Job growth remained firm in December, as employers added 223,000 payroll positions, while the unemployment rate fell, matching a 50-year low. However, wage growth cooled much more than expected and workers clocked fewer hours for a second straight month. The data should allow the Fed to further slow its pace of interest-rate hikes. After the jobs report, the Dow Jones Industrial Average rallied.
The softer components of the jobs report were backed up by a surprisingly weak reading from the Institute of Supply Management's services index, which tumbled to a contractionary reading below 50 for the first time since May 2020.
After the ISM reading at 10 a.m. ET, odds jumped to 76% that the Fed will moderate its rate-hiking to just 25 basis points on Feb. 1.
Jobs Report Hits And Misses
Employment gains topped Wall Street's 200,000 forecast, as the private-sector added 220,000 jobs and government added 3,000 positions.
The average hourly wage rose 0.3% on the month vs. expectations of 0.4%, while there were downward revisions to October and November. Annual wage growth of 4.6% missed forecasts of 5%.
Job gains for October and November were revised down by a combined 28,000.
The unemployment rate, expected to hold at 3.7%, fell to 3.5%.
The headline job and wage figures come from the Labor Department's monthly survey of employers. The separate household survey details labor force participation, work status and the unemployment rate.
The household survey showed the ranks of the employed rose by 717,000. The number of unemployed workers shrank by 278,000, as 439,000 people joined the labor force, meaning they're working or looking for work.
The labor force participation rate among the 16-and-up population ticked up to 62.3% from 62.2%.
Dow Jones, Treasury Yield Reaction
The Dow Jones jumped 1.5% in Friday morning stock market action. The S&P 500 popped 1.4%, while the Nasdaq composite rose 1.2%.
The 10-year Treasury yield fell 12 basis points to 3.6%.
On Thursday, the Dow, S&P 500 and Nasdaq composite all fell more than 1% and closed near the bottom of their trading ranges over the past two months.
The Dow has rallied 14.6% from its Sept. 30 closing low but remains 10.5% below its all-time closing high. The S&P 500 sits 20.6% below its record closing high and 6.5% above its 52-week low on Oct. 12. The Nasdaq is up just 0.9% from its 52-week low on Dec. 28, having fallen 35.8% from its record closing high.
After the recent selling pressure, the Dow Jones and broader market could have a bit of running room to rally. However, the latest Fed meeting minutes included an implicit warning to investors not to get carried away. "An unwarranted easing in financial conditions" could work against Fed policy and "complicate" efforts to restore price stability, the minutes said.
Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.
Futures Loom After Market Takes Big Step; 9 Stocks Flash Buy Signals
Jobs Report Details
Despite solid hiring, the aggregate number of hours worked economywide slipped 0.1% in December after a 0.2% drop in November. That reflects a shorter average workweek, which fell to 34.3 hours last month from 34.4 hours in November and 34.5 in October.
Temp jobs fell 35,000, the third straight monthly decline, which economists see as a potential leading indicator of broader labor market weakness.
Construction jobs rose 28,000 and manufacturing jobs 8,000. Retailers added 9,000 jobs. Leisure and hospitality sector employment rose by 67,000. Health care and social assistance jobs grew by 74,000.
ISM Services
The ISM services index tumbled to 49.6 from 56.5 far below views for 55. Readings below 50 signal contraction.
The ISM new orders subindex dived 10.8 points to 45.2. The employment index slipped 1.7 points to 49.8, due to a combination of economic uncertainty and inability to fill open positions. The supplier delivery index also weighed on the overall ISM reading, but that reflected increased capacity and improving logistics after a period of supply-chain woes.
The ISM's current services business activity index remained positive, but slumped 10 points to 54.7.
Does This Change Fed Outlook?
Financial markets took their cues from the unexpectedly soft wage data. November's initially reported 0.6% rise in the average hourly wage was lowered to 0.4%. The Labor Department data now show wage growth running below 5% for the past three months. The latest reading of 4.6% was the lowest since August 2021. Over the past three months, wage growth has run at a 4.1% annualized pace, noted UBS economist Jonathan Pingle.
Wage growth is key to the Fed outlook. Federal Reserve chair Jerome Powell has said wage growth of 3.5% would be consistent with the Fed's 2% inflation target.
Although there may be more curveballs ahead, the latest news on wages was met with a sigh of relief. But the drop in the unemployment rate and solid job growth, even amid fewer hours worked, means that Fed tightening may continue into spring. With many employers typically awarding wage hikes for current employees at the start of the year, it may be premature to assume that wage growth is on a downward path.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
