Jobs report shows signs of a cooling economy — as well as its resiliency

The final jobs report of 2022 showed U.S. employment growth slowing under the weight of higher interest rates and stubborn inflation, but not enough to derail a historically strong labor market.

The U.S. added 223,000 jobs in December and brought the unemployment rate down to 3.5 percent, its level in February 2020, from 3.7 percent in November, according to the Labor Department. 

While job growth slowed from November’s revised total of 256,000, December’s employment gain still came in above economists’ expectations—and without other warning signs of an overheating economy.

“It’s hard to imagine a jobs report in better balance. Job growth is still strong, so many Americans seeking a job can find one and the economic expansion should continue,” said Robert Frick, corporate economist at Navy Federal Credit Union, in a Friday analysis.

Wage growth continued to slow in December, as earnings rose 0.3 percent on the month and 4.6 percent over the past 12 months. Slower wage growth may leave some Americans further behind in the race to catch up with inflation, but the Federal Reserve considers it an essential step in their mission to bring down price growth.

The employment-population ratio—which measures how many working-age Americans are in the workforce—also rose 0.2 percent in December. A larger workforce could also help bring down inflation as employers have an easier time finding workers and staying fully staffed.

“Wage growth is slowing, which will take some pressure off inflation, and could slow Fed rate increases. Labor force participation rose, pointing to more good jobs reports in the future. And industries that still lack many employees and which are vital for the economy and society, especially health care and social services, had another strong month of hiring,” Frick said.

Job growth is almost certain to keep slowing in 2023 as the combination of higher interest rates and prices continues to strain the U.S. economy. The slight dip in wages is also welcome news for the Fed, but not likely enough to keep the bank from boosting interest rates and putting even more pressure on the economy.

While annual inflation has fallen from a peak of 9.1 percent in June to 7.1 percent in November, the Fed has been wary of declaring victory with wage growth still relatively high. Fed officials have been concerned that the strength of the job market is keeping wage growth too high for inflation to come down, prompting a series of aggressive rate hikes mean to weaken the job market.

“Highly publicized layoffs in the tech sector have not affected the broader economy given how many job openings still exist, and higher interest rates have yet to meaningfully affect the demand for workers,” said John Leer, chief economist at Morning Consult, in a Friday analysis.

“However, as those higher borrowing costs constrain business investment during the first half of this year, hiring will also pull back. We should enjoy this period of relative economic stability while it lasts.”

Updated at 10:25 a.m.