Solid Data Underscores Potential for Pause in January

On Friday, nonfarm payrolls rose by 256k in December, well surpassing the 165k gain expected, and marking a nine-month high. The three-month average, meanwhile, remained steady at 170k for the second consecutive month. November payrolls were revised down from a 227k gain to a 212k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (December data + net revisions) was 248k.

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For the full year, the U.S. economy added 2.2M jobs in 2024, down from the 3M in 2023, but still above the 2M created in 2019.

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In the details of the report, private payrolls rose by 223k in December, a nine-month high. Goods-producing payrolls, on the other hand, declined outright, falling 8k in December due to a 13k drop in manufacturing payrolls. Construction payrolls, however, rose 8k in December.

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Private service producing payrolls rose by 231k in December following a 148k gain in November. Education and health payrolls led the gain in services payrolls in December, rising 80k following an 87k gain in November. Trade and transport payrolls increased 49k, due to a 43k gain in retail trade payrolls in the final month of 2024. Leisure and hospitality payrolls rose 43k, professional and business services payrolls increased 28k, due to a 5k gain in temporary help payrolls, and financial services payrolls climbed 13k in the final month of Q4. Finally, government payrolls rose by 33k in December, up from the 30k increase reported in November.

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Household employment rose by 478k in December following a 273k drop in November. The labor force, meanwhile, increased by 243k following a 124k drop in November. Thus, the unemployment rate unexpectedly ticked down from 4.2% to 4.1% in December, a two-month low. According to the median?forecast, the unemployment rate was expected to remain steady at 4.2% for a second consecutive month.

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The labor force participation rate, meanwhile, remained steady at 62.5% in December for the third consecutive month, as expected.

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Also, average hourly earnings rose 0.3% in December, as expected and following a 0.4% increase in November. Year-over-year, wages rose 3.9%, a slight downtick from the 4.0% annual increase in October and November.

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Finally, the average workweek remained steady at 34.3 hours in December for the fifth consecutive month.

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Bottom Line: The ongoing strength in the labor market and broader economy continues to undermine expectations for further rate relief with the market now pushing out the next round reduction to mid-year, meaning a potential near-term pause at the upcoming January 29 meeting.?

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In fact, according to fed funds futures, the market is looking for roughly just one cut through the end of the year, down from about twice that before Friday’s employment report, with longer-run yields pushing higher as well. The 10-year UST yield is up an impressive 25bps since the December FOMC meeting, currently trading at 4.77% as of 9:33 a.m. ET.?

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Also on Friday, turning to the consumer, sentiment unexpectedly declined at the start of the year, with the latest University of Michigan Consumer Sentiment Index showing a slight decrease from 74.0 to 73.2 in the preliminary January print, a two-month low. According to the median forecast, the index was expected to remain steady at a reading of 74.0.

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In the details of the report, a gauge of current conditions increased nearly three points to a reading of 77.9, a nine-month high, while a gauge of future expectations dropped 3.1 points to a reading of 70.2, a six-month low. Consumers’ inflation expectations in the next five to 10 years, meanwhile, jumped from 3.0% to 3.3%, the highest since 2008.

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This week, the economic calendar begins tomorrow with the December NFIB Small Business Optimism Index, along with the first highlight of the week – the December PPI, followed by the December CPI on Wednesday.?

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Following an as-expected November CPI report, showing a slight uptick on an annual basis, the CPI is expected to rise 0.3% in December, and 2.9% over the past 12 months, a potential increase from the 2.7% annual gain in November and the third consecutive month of acceleration. ??

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On the producer side, following a slightly hotter than expected November report, the PPI is expected to rise 0.4% in December and 3.5% over the past 12 months, also a potential uptick from November’s read of 3.0%. ?

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Excluding food and energy costs, the core CPI is expected to increase 0.2% in December (a potential downtick from the 0.3% gain in November) and 3.3% year-over-year, potentially holding steady for the fourth consecutive month. The core PPI, meanwhile, is expected to rise 0.3% in December and 3.8% on an annual basis, posting a potential increase from the 3.4% pace reported in November. ??

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While some, such as Fed Governor Christopher Waller, appear optimistic inflation will continue to subside, other policy makers are less convinced given the stubbornly elevated level of the data for the past several months, prompting some to revise down their outlook for additional rate cuts in 2025. According to Boston Fed President Susan Collins, for example, a "gradual" pathway for future rate cuts is necessary. ?

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In fact, according to the latest FOMC meeting minutes released last week, Fed officials see "upside risks" to inflation with many noting that the "disinflationary process may have stalled temporarily or noted the risk that it could." ?

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As far as the pathway for future rate cuts, officials noted, "The Committee was at or near the point at which it would be appropriate to slow the pace of policy easing." Following 100bps of rate cuts since September, officials stated that the federal funds rate was now "significantly closer" to the neutral rate.?

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Also on Wednesday, we’ll take a look at weekly mortgage applications, and the January Empire Manufacturing Index. ?

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On Thursday, the latest read on weekly jobless claims, and another highlight of the week – December retail sales – will be released. ?

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Last month, retail sales rose 0.7% in November and 3.8% on an annual basis. This month, sales are expected to rise 0.5% in December and 3.6% year-over-year, a slight loss of momentum from the month prior and potentially marking a one-month low. ?

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Also on Thursday, the Philly Fed Index, import and export price indices, business inventories, and the NAHB Housing Market Index. ?

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Wrapping up the week, on Friday, the December housing starts and permits report will be released. ??

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Last month, starts fell nearly 15% on an annual basis, while permits declined 1.0%. This month, starts are expected to fall just over 16%, potentially marking a seven-month low, while permits are expected to fall 4.8%, a potential one-month low. ?

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Also on Friday, we’ll take a look at the industrial production and capacity utilization reports for December. ?

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Finally, on the Fed-speak front, we will hear from a few officials throughout the week including Jeff Schmid from Kansas City and New York’s Williams tomorrow. Later in the week, on Wednesday, Richmond Fed President Thomas Barkin, Minneapolis Fed President Neel Kashkari, New York Fed President John Williams and Chicago’s Goolsbee will all take the stage before Fed officials enter the scheduled Fed-speak blackout period on January 18 ahead of the January 28-29 FOMC meeting.

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-Lindsey Piegza, Ph.D., Chief Economist