Weekly Update 01/10/2025: US Adds 256,000 Jobs in December – Well Ahead of Expectations – as Unemployment Rate Drops to 4.1%

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Domestic Economic News

US employment in December advanced by the most in nine months and the unemployment rate unexpectedly fell, capping another year of resilience in the labor market. Nonfarm payrolls increased 256,000 following a slight downward revision to the prior two months’ figures, a Bureau of Labor Statistics report showed Friday. The unemployment rate fell to 4.1%, while average hourly earnings rose 0.3% from November, as expected. Treasury yields and the dollar surged and S&P 500 futures fell following the release as traders pared back bets on interest-rate cuts. Friday’s report confirms the labor market held up last year despite high borrowing costs, lingering inflation and political uncertainty. While demand for workers moderated and the unemployment rate rose in 2024, the economy still added 2.2 million jobs — below the 3 million increase in 2023 but above the 2 million created in 2019. The Fed’s focus has returned firmly to inflation following an upturn in recent months, with several officials signaling they may hold rates steady for a while after lowering borrowing costs by a full percentage point in 2024. The BLS will publish monthly data on consumer prices on Jan. 15.

Growth at US service providers quickened in December, reflecting stronger business activity that helped push a price measure to the highest since early 2023. The Institute for Supply Management’s index of services advanced 2 points to 54.1 last month, the group said Tuesday. Readings above 50 indicate expansion. The measure of prices paid for materials and services rose more than 6 points to 64.4. The acceleration in the cost gauge comes as Federal Reserve policymakers adopt a more cautious approach to lowering interest rates and amid uncertainty about what kind of tariffs the upcoming Trump administration may slap on imports. Resilient demand, illustrated by the pickup in business activity and stronger orders, adds to concerns that inflation will remain stubborn. Fifteen of the 18 services industries reported an increase in prices paid in December, while none indicated a decline. One respondent in the finance and insurance sector said that they are moving work offshore to lower costs. “General optimism expressed across many industries, but tariff concerns elicited the most panelist comments,” said Steve Miller, chair of the Institute for Supply Management Services Business Survey Committee. Treasury yields rose and the S&P 500 Index fell after traders upped their bets that the Fed will leave rates unchanged this month amid inflation pressures. ISM’s new orders gauge rose 0.5 point to 54.2, in line with the 2024 average. Combined with a three-month high in the measure of business activity, which jumped 4.5 points, the data suggest the economy remained on solid footing at the end of the fourth quarter. Meantime, the ISM gauge of service employment was little changed at 51.4, suggesting companies are comfortable they can meet demand with existing staffing levels.

US job openings rose to a six-month high in November, boosted by a jump in business services while other industries showed more mixed demand for workers. Available positions increased to 8.1 million from an upwardly revised 7.8 million in October, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, showed Tuesday. The figure exceeded all estimates in a Bloomberg survey of economists. The advance was led almost entirely by openings at professional and business services — which stand at an almost two-year high — as well as finance and insurance. Meantime, accommodation and food services and manufacturing reduced postings. The recent uptick in vacancies represents a break from an almost three-year downtrend that raised concerns of deterioration in the labor market and laid the ground for a series of Federal Reserve interest-rate cuts. Now, the job market appears to be on better footing and inflation has proved stubborn in recent months, scaling back expectations for how much more policymakers will lower rates this year. At the Fed’s last meeting in December, Chair Jerome Powell said the labor market is cooling, but “in a gradual and orderly way,” and he signaled that central bank’s focus has returned firmly to inflation. Layoffs were relatively unchanged at a low level, while the pace of hiring cooled and matched the lowest since April 2020, the JOLTS data showed. The quits rate declined to 1.9%, also matching the lowest since early in the pandemic and was fairly broad across industries. That suggests more people are losing confidence in their ability to find a new job. The number of vacancies per unemployed worker, a ratio the Fed watches closely, held at 1.1, in line with pre-pandemic levels. At its peak in 2022, the ratio was 2 to 1. Some economists have questioned the validity of the JOLTS data, in part due to the survey’s low response rate and heavy revisions. A similar index by job-posting site Indeed showed openings rose slightly in November.

The US trade deficit widened in November, reflecting the biggest jump in imports since March 2022 as companies accelerated shipments ahead of a possible dockworkers’ strike and in anticipation of potential tariffs by the Trump administration. The gap in goods and services trade grew 6.2% from the prior month to $78.2 billion, Commerce Department data showed Tuesday. The figure was in line with the median projection in a Bloomberg survey of economists. The value of imports increased 3.4% from a month earlier to $351.6 billion. Exports rose 2.7%. The figures aren’t adjusted for inflation. The jump in imports was broad, including increases in consumer goods, capital equipment and motor vehicles, likely reflecting a preference by US companies to secure shipments in advance of potential tariffs. Moreover, many are hoping to mitigate disruptions from a potential strike by dockworkers with a mid-January deadline to reach a deal. The figures follow an October downshift in demand for foreign merchandise after companies doubled up efforts to ensure they were well-stocked ahead of holiday-shopping season. Goods and services trade in the third quarter subtracted from gross domestic product, and the latest net exports figures suggest a similar impact is possible in the final three-month period of 2024. US manufacturers, as well as service providers, remain challenged by weak overseas economies and a strong dollar that risk keeping the trade gap wide this year. On an inflation-adjusted basis, the merchandise trade deficit widened to $96.5 billion in November.

US private-sector hiring and wage growth slowed in December, indicating an ongoing moderation in demand for workers. Employment rose by 122,000 last month — the least in four months — following a 146,000 increase in November, according to ADP Research Institute data published Wednesday. The median projection in a Bloomberg survey of economists called for a rise of 140,000. The report showed employment growth was mixed across industries. Education and health services, construction as well as leisure and hospitality registered the biggest increases. Manufacturing, natural resources and mining as well as professional and business services saw declines in headcount. Wednesday’s figures suggest the gradual softening in the US labor market in 2024 extended through the end of the year. Federal Reserve officials will have to balance that trend against renewed inflation fears in deciding how far to continue cutting interest rates in 2025 and beyond. “The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains,” said Nela Richardson, chief economist at ADP. The ADP report, published in collaboration with Stanford Digital Economy Lab, showed wage growth cooled further. Workers who changed jobs saw a 7.1% increase in pay, while those who stayed put saw a 4.6% gain, the slowest since mid-2021. ADP bases its findings on payrolls covering more than 25 million US private-sector employees. The West was the biggest driver of job gains by region, while companies with at least 500 employees accounted for the vast majority of job creation last month. Separate data published Wednesday by the Labor Department showed initial filings for unemployment insurance fell to 201,000 in the week through Jan. 4, the lowest since February. Meantime, recurring applications in the previous week climbed to 1.87 million. The data can be choppy from week to week, especially around the holidays.

Interest Rate Insight and the Fed

Federal Reserve Bank of Atlanta President Raphael Bostic said officials should be cautious with policy decisions given uneven progress on lowering inflation and err on the side of keeping interest rates elevated to achieve their price stability goals. Bostic, speaking in a podcast recorded on Dec. 9 and released Tuesday, also said his outlook is for inflation to continue to gradually decline this year to the Fed’s 2% target. He said he expects price pressures to ebb despite moments where it may look like progress is stalling or inflation is moving more aggressively. “Given that kind of bumpiness in the measures, I think that will call for our policy approach to be more cautious,” Bostic said in the conversation recorded by the Atlanta Fed ahead of the central bank’s Dec. 17-18 policy meeting. Fed officials lowered interest rates for the third straight time last month, bringing their benchmark rate down by a full percentage point since September. Bostic voted in favor of that decision. Median projections released at the December meeting showed policymakers see just two quarter-point rate cuts for this year. “I want to make sure we get the right signal, and make sure that our policy is calibrated to that right signal. And if we’ve got to err, I would err on the upside,” Bostic said in the podcast. “I would want to make sure — for sure — that inflation gets to 2%, which means we may have to keep our policy rate higher longer than people might expect.” Fed Chair Jerome Powell has said officials will be looking for further progress on inflation when deciding on future rate adjustments. Other officials, including Fed Governor Lisa Cook, have said policymakers can move more cautiously with interest rate cuts, pointing to a sturdy labor market and sticky inflation. Bostic said early last month, prior to recording the podcast, that the labor market was stable. He also said he thought inflation was on a sustainable path to the Fed’s 2% target despite some bumpiness in the data.

Impactful International News

Euro-area inflation accelerated last month, supporting the European Central Bank’s gradual approach to reducing interest rates, without derailing them altogether. Consumer prices rose 2.4% from a year ago in December, up from 2.2% in November and matching the median estimate in a Bloomberg poll. The increase was largely driven by energy costs, which climbed for the first time since July, Eurostat said. Core inflation, which strips out such volatile components, stood at 2.7%. In the services sector, price growth edged up to 4%. The pickup will come as no surprise to the ECB, which has repeatedly warned that the path back to its 2% target will be bumpy. It only expects to sustainably hit that milestone toward year-end. Bonds were little changed after the data. The German two- year yield, among the most sensitive to monetary policy, was one basis point lower at 2.18%, just below a two-month peak reached yesterday. Wagers on ECB rate cut expectations were also steady, with swaps pricing pointing to just over 100 basis points easing by year-end. National reports in recent days already showed prices rising more strongly than estimated in Germany and Spain, while they increased less than anticipated in France and unexpectedly slowed in Italy. A separate report from the ECB showed that inflation expectations of consumers increased in November.

Officials are still on track to keep lowering borrowing costs after a fourth reduction in December. At 3%, the deposit rate is still seen by most as restricting economic activity at a time when the currency bloc is failing to mount a strong recovery. Most back “gradual” cuts at the upcoming meetings, meaning quarter-point increments. A few Governing Council members, including Bank of France Governor Francois Villeroy de Galhau, insist that the option of a bigger reduction must remain on the table, however. While inflation already dipped below 2% last year, the retreat was driven by statistical effects related to strong swings in energy costs over recent years. As they fade, the headline number is temporarily rebounding. Concern about inflation in the services sector remains, however. It’s been stuck at about 4% for more than a year, largely due to rising wages, which play a greater role in that part of the economy than elsewhere. The ECB doesn’t see this situation persisting. Workers’ pay grew at a slower pace in the third quarter, and early indicators point to a softening in the jobs market. The increase in energy prices might not be the last one. Russian gas is no longer being transported via Ukraine and Europe is burning through gas reserves more quickly than at any point in the last seven years as cold weather ramps up heating needs. President Christine Lagarde said last week that after progress made in 2024, “hopefully 2025 is the year when we are on target as expected and as planned in our strategy.” A big question mark hangs over incoming US President Donald Trump’s plan to impose wide-ranging trade tariffs. Those could jolt the euro-area economy, with the impact on inflation to be determined by factors including the exchange rate and potential counter-measures by the European Union and China. Dutch central-bank chief Klaas Knot warned recently that if Trump makes good on his promise, Chinese goods could enter Europe “at lower and lower prices,” effectively exporting that country’s struggles with deflation

German factory orders dropped the most in three months, highlighting industry’s woes just weeks before Chancellor Olaf Scholz faces elections. Demand fell 5.4% in November from the previous month, far worse than the 0.2% decline economists had predicted in a Bloomberg survey. That’s due to a drop in large-scale orders. Stripping out that element, the gauge would have increased by 0.2%, the statistics office said. “Without the large orders, at least there are indications of a bottoming out at a low level,” said Vincent Stamer, an economist at Commerzbank. “There’s still no sign of the situation in German industry recovering.” The country’s manufacturing sector has been weighing on the broader economy since 2022, with cyclical issues increasingly giving way to structural problems such as worker shortages and lofty energy costs. The economy probably contracted for a second year in 2024 and the Bundesbank is predicting a rebound of just 0.2% this year. That weakness is a focus in Feb. 23 elections, which will likely see Scholz ousted in favor of Friedrich Merz, who leads the main opposition conservative CDU/CSU bloc. The Social Democrat’s term that started in 2021 has been marred by a number of issues including the pandemic, a cost-of-living crisis following Russia’s war in Ukraine and weak Chinese demand for German products. A new chancellor will face similar growth hurdles, with the threat of US tariffs — once Donald Trump returns to the White House later this month — adding to the challenges for Europe’s biggest economy. A first estimate for fourth-quarter output is scheduled for Jan. 15. Economists currently predict an expansion of just 0.1% in the period, though the Bundesbank has warned that a stagnation looks likely.

On a brighter note with respect to Europe’s most powerful economy, German industrial production increased in November, offering hope that the country’s struggling manufacturing sector may have begun to stabilize toward the end of last year. Output rose 1.5% from the previous month, better than the 0.5% advance that economists had predicted in a Bloomberg survey. On a three-month basis, it was 1.1% lower, the statistics office said Thursday. Germany’s economy is giving mixed signals, with the report highlighted above from Wednesday showing that factory orders plunged 5.4% in November. That figure as mentioned was distorted by volatile large-scale orders, without which the indicator would have increased 0.2%. Manufacturing is facing extended malaise. Worries over deindustrialization are playing a prominent role before February’s snap election, where Chancellor Olaf Scholz is set to be defeated by Friedrich Merz’s conservative CDU/CSU bloc. The current downturn is largely blamed on high costs of energy and other inputs that are worsening German competitiveness on the global stage. Here are some insights from Bloomberg Economics: “Despite the stronger-than-expected production uptick in November, the near-term outlook for the German industry remains gloomy. We expect the industry weakness to continue to weigh on overall economic activity and see GDP growth in 2025 to be very modest, following two years of contraction. Further troubles of the manufacturing sector, such as a potential notable lift of US tariffs on European exports, could easily push Germany back into recession territory.” —Martin Ademmer, economist. The country is on track to post a second consecutive annual decline in gross domestic product, with a first estimate for 2024 due to be presented by the statistics office next week. The Bundesbank only expects a minor rebound of 0.2% this year, driven by firmer foreign demand. In November, exports rose 2.1%, while imports fell 3.3%, the statistics office said. A major risk is Donald Trump’s threat to impose wide-ranging tariffs when he returns to the White House this month. Some help may come from the European Central Bank, which is on track to keep lowering interest rates after cutting them four times in 2024.

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