For anyone who was hoping to ease into the macro data releases of the new year, the December employment report certainly did not offer such opportunity. Reported job gains totaled 256k, far above the 165k consensus. Revisions to the prior two months were insignificant. The participation rate was unchanged at 65.5% and the unemployment rate eased a tenth to 4.1%. The market reaction was violent with investors trimming Fed rate cut expectations to a single rate cut in 2025.
The response may have been overblown. Yes, the headline was much stronger than expected. But a single sector— retail—explained the bulk of the upside surprise and the story it tells seems to be one of catch-up, rather than sustained resurgence.
But let’s start with the big picture. Private payrolls grew by 223k, with services adding 231k and goods producing sectors losing 8k. Manufacturing was down 13k. Within services, trade and transportation added 49k jobs, 43k of them in retail. Contrast this with November’s 29K loss and 70% of the upside surprise in December is clarified. We had mentioned last month that the decline in retail employment could well reflect a shortened holiday season; the new data validate that hypothesis. But if that’s the driver, we should not be counting on persistent strength here. Elsewhere within services, we were a little surprised by the 28k rise in professional services. Nonetheless, this category has oscillated between gains and losses through most of 2024 so to us, the strong December seems more suggestive of a decline in January than a trend improvement. The two big service sectors—education/healthcare and leisure/hospitality—were steady and betrayed no signs of acceleration.
Neither did the hours data. Average weekly hours were flat and average manufacturing hours declined. Wage inflation was also well behaved, with total average hourly earnings (AHE) up 3.9% y/y (a tenth less than in November). Moreover, average hourly earnings for production and non-supervisory employees rose 3.8% y/y. With the exception of distorted readings in April and May 2021, this was the lowest annual gain since before the pandemic.
Our read is that this report was not nearly as strong as the headline made it appear. Investors dramatically lowered the odds of a March rate cut as a result and have also trimmed 2025 rate cut expectations to just one. We still think a March cut is likely, but its likelihood is indeed more questionable after this report. More importantly, we believe strongly that the Fed has room to cut rates multiple times this year. Calls for no more cuts or even hikes simply in response to this one report seem premature.
