Labor Market and Wage Growth Defy Expectations—What It Means for 2025
Weekly Economic Review: February 10, 2025
The labor market slowed, but remained quite strong overall. The robust wage growth and resilient employment that will support consumer spending are good news for economic growth, not so good for near-term interest rate reductions
Last week was quite eventful with numerous economic data releases, but they had little impact on the markets. The stock market did experience a decline, but this was primarily due to disappointing earnings from major tech companies and uncertainties around trade policies rather than emerging economic news. Meanwhile, the bond market exhibited mixed performance.
Job openings in December fell short of expectations, declining after a strong gain in November. Hiring increased, however, and layoffs saw a slight decrease. There was a small uptick in the number of workers who voluntarily quit their jobs. The ratio of job openings to unemployed workers remained steady at 1.1 for the sixth consecutive month, indicating solid job demand.
According to the Institute of Supply Management (ISM), the service sector’s performance in January was softer than expected but still marked its seventh consecutive month of expansion. Busi-ness activity and new orders growth slowed, primarily due to poor weather conditions, while employment grew at the fastest pace since September 2023. Prices paid for materials and services decreased in January after a significant rise in December, which had reached its highest level since 2023.
Labor productivity growth decelerated in the fourth quarter, yet the annual increase of 2.3% represented another significant efficiency gain, the highest since 2010, excluding the pandemic surge in 2020. The slower productivity growth in the fourth quarter contributed to higher labor costs. How-ever, the robust annual productivity growth over the past two years has helped to contain labor cost increases, keeping them closer to the inflation target.
Job growth remained healthy in January, though it moderated following significant gains in December and November. While January’s figures were below market expectations, the upward revisions for December and November revealed the creation of 100,000 more jobs than had initially been re-ported. The unemployment rate decreased, and both monthly and annual wage growth exceeded expectations.
Let’s examine in more detail the Job Openings and Labor Turnover (JOLTS), the ISM service sec-tor index, labor productivity and costs, and job creation and employment situation that were announced last week.
JOLTS: The Bureau of Labor Statistics (BLS) announced that the number of job openings decreased by 556,000 in December, to 7.60 million from an upwardly revised 8.16 million (originally 8.10 million) in November. This was lower than the market expectation of 8.00 million. On an annual basis, it was down by 1.29 million from a year ago. The monthly decrease was mainly driven by losses in professional and business services (225,000), health care and social assistance (180,000), and fi-nance and insurance (136,000), partially offset by a gain in arts, entertainment, and recreation (65,000). Regionally, the month decrease was mainly driven by losses from the South (286,000) and West (250,000).
The ratio of openings to unemployed people remained unchanged at 1.1. The number of hires in-creased by 89,000 to 5.46 million in December from an upwardly revised 5.37 million (originally 5.27 million) in November. The increase in December hires was mainly driven by a gain in finance and insurance (48,000). On an annual basis, it declined by 325,000 from a year ago. Except for the Midwest, all four regions posted small increases in hires for December.
Layoffs decreased slightly by 29,000 to 1.77 million after gaining 52,000 to 1.80 million (revised up from 1.75 million) in November, which came in higher than the market expectation of 1.74 million. Layoffs were up by 164,000 over the year. The increase in layoffs was mainly driven by increases in transportation, warehousing and utilities (87,000) and mining and logging (6,000). All regions except the West posted increases in layoffs, while layoffs in the West declined by 162,000.
The number of people who voluntarily resigned increased by 67,000 to 3.20 million in December after declining by 153,000 in November to 3.13 million (revised up from 3.07 million). The December figure came in higher than the market expectation of 3.11 million. On an annual basis, it declined by 242,000 over the year. The quits rate, the rate at which workers voluntarily leave their jobs, excluding retirements, remained unchanged at 2.0%.
ISM Report On Business Services Sectors:The ISM released its January report on economic activities for the service sectors, which make up 70% of the private economy in terms of both employment and GDP. The ISM services index, which gauges the economic health of the service sector, registered at 52.8, down 1.2 points from December’s reading of 54.0. An index reading above 50 indicates growth in the services sector. The January figure also fell short of market expectations.
The ISM’s business activity index, akin to factory production, dropped 3.5 points to 54.5 in January from 58.0 in the previous month, marking the fifty-sixth consecutive month of expansion. The new orders index, a forward-looking indicator, declined by 3.1 points to 51.3 from 54.4 in December. The slower growth in business activity and new orders was primarily attributed to the recent severe weather conditions.
The employment index edged up by 0.1 to 52.3 from 52.2 in the prior month, remaining in expansion territory for the fourth consecutive month. The supplier deliveries index rose to 53.0, 0.5 points higher than December’s reading of 52.5, marking the second consecutive month of expansion. Additionally, the prices index came in at 60.4, a 4-point decrease from December’s reading of 64.4.
Productivity & Costs (Preliminary):The Bureau of Labor Statistics reported that nonfarm business sector labor productivity rose by 1.2% in the fourth quarter, following a 2.3% increase in the third quarter. During this period, output grew by 2.3% while hours worked increased by 1.0%. Annually, labor productivity saw a 2.3% rise in 2024, up from 1.6% in 2023, surpassing the 1.5% annual average over the past 15 years. Unit labor costs climbed by 3.0% in the fourth quarter, after a modest 0.5% rise in the third quarter, driven by a 4.2% increase in hourly compensation and a 1.2% boost in productivity. For the year, unit labor costs increased by 2.6% in 2024, compared to a 2.2% rise in 2023, indicating slight inflationary pressure.
Job Creation and Employment Situation:The Bureau of Labor Statistics (BLS) reported that businesses added 143,000 new jobs in January, following an upwardly revised increase of 307,000 jobs in December (originally reported as 256,000). The January job growth fell short of the anticipated 175,000 despite significant contributions from health care (44,000), retail trade (34,000), social assistance (22,000), and government (32,000). Additionally, November’s job creation figure was revised up by 49,000, from 212,000 to 261,000. Combined, the revisions for November and December added 100,000 more jobs than previously reported. Consequently, the three-month average of monthly job growth, which helps smooth out monthly fluctuations, rose to 237,000 from 204,000 in December.
The unemployment rate continued to decline, reaching 4.0% in January, down from 4.1% in December and below the market’s expectation of 4.1%. The number of job losers (or layoffs) de-creased slightly by 16,000 to 3.24 million, driven mainly by a reduction of 27,000 in temporary layoffs, partially offset by an increase of 11,000 in permanent layoffs. Additionally, the number of job leavers – unemployed individuals who voluntarily quit their jobs and immediately started looking for new employment – decreased by 35,000 to 912,000 in January, after rising by 93,000 to 947,000 in December. Employment in temporary help services, a leading labor market indicator, stood at 2.53 million in January, continuing its downward trend over the past two months and remaining below the pre-pandemic level of 2.9 million.
The labor-force participation rate, which measures the percentage of working-age people who are employed or actively seeking work, edged up to 62.6% from 62.5% in the previous month, surpassing the market expectation of 62.5%. The number of people working part-time for economic reasons—those who would prefer full-time employment but are working part-time due to reduced hours or inability to find full-time jobs—increased by 119,000 to 4.47 million in January, following a decline of 111,000 in December. Wage growth, measured by average hourly earnings, rose by 0.5% in January after a 0.3% increase in December, exceeding the market expectation of 0.3%. On an annual basis, wages grew by 4.1%, matching the revised figure for the previous month (up from 3.9%) and surpassing the market’s expectation of 3.8%.
On a concluding note,despite a decline in job openings and new jobs, the labor market showed continued strength in the form of steady hiring, low layoffs, strong job demand, healthy job growth, low unemployment, robust wage growth, and high labor productivity. This resilient labor market is expected to continue supporting consumer spending and economic growth. These factors, along with uncertainties surrounding the Trump administration’s policies, are likely to prevent the Federal Reserve from lower-ing interest rates in the immediate future.
Regarding rate cut predictions, the market anticipates a 100% probability of a 0.25% rate cut and an 43% chance (down from 88% a week ago) of an additional 0.25% rate cut in 2025. No rate cuts are expected until the July or September FOMC meeting.
Last week, the Treasury yield curve flattened. Short-term yields saw a slight increase, while mid- and long-term yields experienced a slight decline. The two-year, five-year, and ten-year Treasury yields closed at 4.29%, 4.34%, and 4.49%, respectively. The two-year yield rose by 7 basis points, whereas the five-year and ten-year yields fell by 2 and 9 basis points, respectively, com-pared to the previous week.
Looking ahead,the Consumer Price Index (CPI) and Producer Price Index (PPI) reports for January are set to be released on Wednesday and Thursday, respectively. The market anticipates a monthly headline CPI increase of 0.3% and an annual headline CPI of 2.9%. Additionally, January retail sales data will be announced on Friday, with the market expecting no change (0.0%), down from the 0.4% in-crease recorded in December.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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