The unemployment rate edged down to 4.1 percent, reversing the small rise in November. The unemployment rate has remained in the narrow range between 4.0 percent and 4.3 percent since May.

The 256,000 job gain in the establishment survey was more than had generally been expected. The sharp slowing of immigration in the summer has apparently not had an effect on job growth yet. However, this should show up in future months, especially if the new administration follows through with plans for large-scale deportations.

Before the pandemic and subsequent surge in immigration, the Congressional Budget Office projected that we would be creating just 20,000 jobs a month in 2024 and 2025 due to the retirement of the baby boom cohorts. We may see job gains closer to this rate later in 2025.

Lower Unemployment Indicates the Labor Market Remains Healthy

There have been various signs that the labor market is weakening, most notably the drop in the hiring rate in the JOLTS. It fell from a high of 4.6 percent in the second half of 2021 to just 3.3 percent in November. The November rate was well below the pre-pandemic level and equal to the rate seen in 2013 in the slow recovery from the Great Recession.

However, other data look much better; notably, the rate of layoffs and firing remains low – at 1.1 percent it is below the pre-pandemic lows. The main story here is that the quit rate, at 1.9 percent, is below pre-pandemic levels and well below peaks of 3.0 percent reached several times earlier in the recovery.

The point is that if people aren’t quitting, employers don’t need to hire much, since the flow of workers between jobs swamps net job gains. The question is whether people don’t quit because they think their other job prospects are poor or because they like their jobs.

In addition to the drop in the unemployment rate, other evidence in the household survey also supports the strong labor market view. There was a 1.8 pp jump in the share of unemployment due to voluntary quits, which had been unusually low. The 13.8 percent share of unemployment resulting from voluntary quits is in line with what we would expect with a 4.1% unemployment   rate. We expect more workers will be willing to quit their jobs, without another job lined up, in a strong labor market.

The share of long-term unemployed (more than 26 weeks) fell 0.7 pp, to the lowest level since August. There was also a modest uptick in the prime age (25 to 54) employment-to-population ratio from 80.4 percent to 80.5 percent. This is still slightly below the recent peak of 80.9 percent, but almost equal to the pre-pandemic high of 80.6 percent.

Unemployment Rate for Black Workers Falls to 6.1 Percent

The unemployment rate for Black workers fell 0.3 pp to 6.1 percent. This is still well above the 4.8 percent rate hit last spring, but relatively low by historical standards. It dropped 0.4 pp to 5.6 percent for Black men and 0.5 pp to 5.4 percent for Black women. However, the unemployment rate for Black teens rose 2.1 pp to 20.2 percent. While this is bad news, it’s worth noting that these data are highly erratic and the rise in unemployment was entirely due to a rise in labor force participation, as the EPOP for Black teens actually rose by 0.7 pp.

Wage Growth and Productivity Growth Still Solid

The annualized rate of wage growth over the last three months was 4.1 percent, a hair higher than the year-over-year rate of 3.9 percent. There has been little change in the pace of wage growth over the last year, an important piece of evidence the labor market remains strong.

The index of aggregate weekly hours increased by 0.2 percent in December. For the quarter the index grew at just a 1.3 percent annual rate. However, there were substantial declines in the number of people reported as being self-employed, both incorporated and unincorporated. This means that hours growth overall is likely to come in under 1.0 percent. With GDP likely to come in around 2.7 percent in the quarter, it looks like we will have another good quarter for productivity growth.

Manufacturing Loses Jobs, Construction Job Growth Slows

The manufacturing sector lost 13,000 jobs, all on the durable side. Manufacturing of non-durables actually added 3,000 jobs. Employment in durable manufacturing is now down 82,000 since May. This is the wrong direction for job growth but not the sort of plunge we typically see in a recession. In the Great Recession, we saw job losses in durable manufacturing of more than 100,000 in several months.

Construction added just 8,000 jobs for the second consecutive month, well below its average of more than 17,000 in the year to November. Growth is likely to edge lower in the months ahead as the boom in factory construction is slowing and higher interest rates are finally taking a toll on residential construction.

The motion picture industry added 10,800 jobs. This puts employment up by over by just 29,300 from last December’s level. The Los Angeles fires may have an impact on this figure for January.

Another Very Solid Employment Report

There is very little to complain about in the December jobs report. There had been some signs of weakening in the labor market in recent months and some basis for concern that this would continue. The drop in unemployment, coupled with a reduction in the number of long-term unemployed and the increase in unemployment due to voluntary quits all support the view that the labor market remains strong, even if weaker than the unsustainable peaks of 2022 and early 2023.

The pace of nominal wage growth implies solid real wage gains at close to a 2.0 percent annual rate, something we have not been able to sustain in the last half century. With productivity also advancing at a strong pace, this growth can be maintained without inflation.

There will be one more jobs report attributable to the Biden administration, but it looks like he will be handing off an incredibly strong economy this month.