As the new year begins, investors are eagerly awaiting the December U.S. labor market data, a key metric closely watched by the Federal Reserve alongside inflation.

The report, due on Friday, Jan. 5, is pivotal in understanding the future direction of U.S. monetary policy.

December Jobs Report: What Do Economists Expect?

  • The data from the Bureau of Labor Statistics is expected to show a growth in non-farm payrolls of 170,000 in December, a slight decrease from November's 199,000. This anticipated figure points towards a still-healthy, albeit slightly cooling, labor market.
  • The growth in average hourly earnings is projected to show a slight easing from 4% year-on-year in November to 3.9% in December.
  • On a month-over-month basis, the average hourly earnings' growth pace is expected to slow to 0.3%, down from November's 0.4% increase. These wage dynamics are crucial for understanding inflationary pressures and consumer spending potential in the months to come.
  • The unemployment rate is forecast to tick up slightly from 3.7% to 3.8%.
Insights from ADP's Private Payrolls Data

Ahead of the official report, data from Automatic Data Processing Inc. (ADP) showed that employment growth was 164,000 in December, surpassing the expected figure of 115,000. This uptick, higher than November's 101,000, suggests resilience in the private sector.

"We're returning to a labor market that's very much aligned with pre-pandemic hiring. While wages didn't drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared," Nela Richardson, chief economist at ADP, said.

Market Expectations and Fed's Stance

The labor market remains a focal point for the Federal Reserve, as reflected in their latest minutes. Fed officials have noted the market's tightness, underscored by a low unemployment rate, robust payroll gains, a high level of job vacancies, and elevated nominal wage growth.

However, they also observed signs of improvement in labor market imbalances, such as declines in job openings and an increase in qualified applicants for open positions.

Still, there were indications of labor market imbalances beginning to improve. This improvement was noted through declines in job openings and quits, as well as reports of more qualified job applicants for open positions.

Any deviation from the expected figures could lead to significant market movements and adjustments in monetary policy expectations, making this report a key focus for January 2024's market narrative.

Market participants are currently pricing in a 65% probability of a Fed rate cut in March, as indicated by Fed futures pricing from the CME Group. The Federal Reserve, however, maintains its stance of data dependency, signaling that future policy decisions will continue to be informed by incoming data and their implications for the economic outlook.