US jobs market strengthened unexpectedly in December

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Economists believe the US jobs market weakened in December, bolstering the case for the Federal Reserve to consider cutting interest rates.

A poll by Reuters showed economists, on average, predict data published on Friday will show the US economy added 170,000 jobs in December, down from 199,000 in November.

The economists also say the number of non-farm payrolls, collated by the Bureau of Labor Statistics, will show a small rise in unemployment to 3.8 per cent in December, up from 3.7 per cent a month earlier.

The jobs data, due out at 8.30am Eastern time, is a crucial metric for the Fed as its officials assess the health of the US economy — and Friday’s monthly update comes as economists and rate-setters debate how quickly and when the central bank should cut interest rates.

Other employment data published by the BLS earlier this week showed the number of new job openings across the US in November fell to its lowest level in two years.

Despite the signs of a slowdown in job creation, the December figure would cap a much better than expected year for the US labour market.

“We’re likely to have added over 2.7mn jobs over the course of 2023, which would be the strongest performance since 2015 if you exclude the Covid disruptions,” said Gregory Daco, chief economist at EY. “It’s an indication of the robustness of the labour market.”

The big question for 2024 is whether a slowdown in the labour market can continue to cool with only minimal impact to the broader economy.

The Fed is betting on only a small rise in unemployment to 4.1 per cent by the end of 2024. Officials believe a rise of that magnitude would help lower inflation towards their 2 per cent goal without crashing the economy, paving the way for them to cut rates later this year. The latest projections from US central bank officials, published in December, show they expect the Fed to lower borrowing costs by 75 basis points over the course of 2024.

However, some economists are doubtful that such a soft landing for the jobs market can be achieved.

“The least likely scenario, in my mind, is that the unemployment rate will gradually drift higher,” said Drew Matus, chief market strategist at MetLife Investment Management. “I am predicting a shallow recession during the first half of this year. And in the past, when we’ve had a recession, we’ve seen the unemployment rate move higher fast.”

“The idea underlying the Fed’s message is that the labour market will just slowly weaken over time,” Matus added. “That’s usually not the way it behaves.”

Additional reporting by Kate Duguid in New York