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Economy adds 223,000 jobs in December, showing resilience while cooling

December will mark two straight years of strong growth, as well as a slowdown, which could help smaller employers that have struggled to hire

A softening in the labor market appears to be benefiting small- and medium-size employers that had spent much of 2022 scrambling for workers. (Nam Y. Huh/AP)

The U.S. economy added 223,000 jobs in December, even as some industries are experiencing a slowdown, reflecting the unusual forces at work in a labor market that is both resilient and cooling.

The unemployment rate inched down to 3.5 percent, according to the latest data from the Bureau of Labor Statistics, hovering near longtime lows as workers have been able to rebound quickly from layoffs.

December marked the 24th straight month of robust, often sizzling job growth, although it also had the lowest number of job gains in that time frame. Two years of hardy job growth have shifted the balance of power in the labor market, giving workers more options to seek better jobs and higher wages. Bigger companies with deeper pockets often had the upper hand.

With the economy cooling off, the dynamic is changing as big companies that overextended themselves begin to cut jobs. At the same time, a softening in the labor market appears to be benefiting small- and medium-size employers that had spent much of 2022 scrambling for workers, limited by a smaller labor pool shaped by the pandemic. More of these companies are now finding the employees they need, experts say.

“It’s hard to talk about the labor market in a single breath,” said Aaron Terrazas, chief economist at Glassdoor. “The main takeaway is the labor market is slowing, but it remains hot by historic terms.”

Friday’s jobs report was the latest snapshot to reinforce that the Federal Reserve’s work to curb inflation, by hiking interest rates, appears to be tempering the labor market without dire consequences for most workers, so far. Financial markets cheered the December job gains, with the S&P 500 and the tech-heavy Nasdaq composite index both closing up more than 2.2 percent. White House officials were also quick to take credit.

“Today’s report is great news for our economy and more evidence that my economic plan is working,” President Biden wrote in a statement. “This moderation in job growth is appropriate, and we should expect it to continue in the months ahead, even as we maintain resilience in our labor market recovery.”

Still, mass layoffs by some large and high-profile employers have sounded alarms in the tech sector, as well as advertising, media, finance and professional services, in the lead-up to the holidays and into the new year. This week, Amazon and Salesforce announced massive cuts of their corporate workforces, citing economic uncertainty and rapid hiring during the pandemic. Stitch Fix, the retail subscription service and onetime Wall Street darling, said Thursday that it would lay off 20 percent of its staff.

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“There has been an ongoing hunt for talent — and larger firms won that competition last year,” said Nela Richardson, chief economist at payroll processing firm ADP. “They were able to offer more benefits and higher salaries. But as larger firms realized that they may have hired too aggressively, we’re seeing them back off, which is creating new opportunities for smaller firms.”

Indeed, ADP’s latest survey of private payrolls found that large employers cut 151,000 jobs in December, while firms with fewer than 500 employees added nearly 400,000 new jobs that month.

“It’s a very fragmented job market, and firms and industry are no longer moving in lockstep,” Richardson said.

Some of the largest job gains were in leisure and hospitality, which rose by 67,000, with big increases in food services, drinking establishments, amusements and gambling. The sector has struggled to recover jobs lost during the pandemic and is about 6 percent, or roughly 1 million jobs, below its February 2020 level.

Health care gained 55,000 jobs, with a boost in ambulatory health-care services, hospitals and nursing homes. An aging population with growing health-care needs, alongside a brutal season for the flu and other illnesses, continues to intensify demand for health-care workers, in particular nurses.

Coming out of the pandemic, consumers have shifted spending away from goods and e-commerce purchases toward experiences and services, such as dining out or getting a haircut. And the easing labor market is leading more workers into these jobs.

In Georgia, diner owner Ronda Sherwood said it has been extremely tough to find workers for the past couple of years. The “help wanted” ads she posted on jobs sites like Indeed and Facebook went largely ignored — at least until a few weeks ago. All of a sudden, she began getting multiple applicants for each job, she said.

She filled her last open position last week and is now fully staffed with 22 employees.

“When the economy is great, it’s very hard to staff restaurants and lower-wage jobs,” she said. “But when the economy is getting worse and companies do start laying off, that’s when we’re able to staff better-quality people.”

While hiring is picking up for some retailers and restaurants, the worker shortage continues to plague some sectors, as large numbers of workers still remain out of the workforce. The labor force participation rate edged up slightly in December by one-tenth of a percentage point to 62.3 percent, but it remains roughly 1 percent below its pre-pandemic levels.

By other benchmarks, the labor market remains quite strong. Unemployment insurance claims for the final week in December fell again to a low level more common before the pandemic, according the Labor Department. In November, workers continued to quit their jobs at historically elevated rates, although at a slower pace than a year earlier, according to labor turnover data from the Bureau of Labor Statistics.

“There’s a pretty sharp disjunction with some sectors bearing the brunt of the cooling we’ve seen in the labor market,” said Guy Berger, principal economist at LinkedIn. “There are parts of the economy like health care and education and the government that are overall holding in there. And there are other parts of the economy that are struggling.”

Much of the recent layoffs have been concentrated among major tech companies that hired aggressively during the pandemic. Those job cuts, combined with stock market drops and back-to-office mandates, have given an upper hand to smaller players in the sector, according to Quinton Newman, who owns a small business that connects start-ups with software developers. Among recently laid-off tech workers, nearly 40 percent found a job within one month and roughly 80 percent did so within three months, according to a Zip Recruiter report.

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“During the pandemic, Big Tech provided what a lot of smaller companies couldn’t: large compensation packages that were tied to the stock market and quarterly earnings,” Newman said. “But as values went down and companies started doing layoffs, people are realizing there’s still a lot of opportunity in the small and medium space.”

As a result, he said, many small businesses that had been unable to attract experienced developers, managers and executives are finding that they’ve become an attractive option, particularly if they allow employees to work remotely.

“You have these layoffs, plus companies like Twitter, Amazon, Facebook and Microsoft saying remote workers have to start coming back in, and there is suddenly a lot of motivation to go from a bigger company to a smaller one,” Newman said. “People are willing to make that trade-off now.”

Economists predict the slowdown in the labor market will deepen this year, because Federal Reserve officials plan to keep raising interest rates to get inflation more under control. One red flag showed up in the December jobs report, as temp help services saw a steep drop in employment, losing 35,000 jobs. Losses in this sector can be a bellwether for economic downturns, because employers tend to shed temp workers before permanent employees.

“There is reason to be pessimistic about where the job market is headed in 2023,” Berger said. But “we’re still in the point where the job market is pretty tight. Maybe the options aren’t as good as they once were, but people can still find jobs quickly.”

The differing labor market forces complicate the Federal Reserve’s top goal of quelling inflation by bringing down hiring. Economists fear that elevated wage growth triggered by increasing demand for workers will push the Fed to jack up interest rates, raising the likelihood of widespread job losses in the future.

But in welcome news for the Fed, wage growth moderated in December. Average hourly earning rose 0.3 percent between November and December, the lowest increase in more than a year. Overall hourly earnings increased by 4.6 percent over the past 12 months, to an average of $32.82 an hour.

The central bank raised rates seven times in 2022 and plans to lift them again two or three times this year with hopes of softening the economy enough to slow down rising prices. Despite last year’s efforts, inflation rose to 9.1 percent in the summer and tapered off to 7.1 percent in November. The aim is to bring inflation down closer to 2 percent without triggering a recession.

Still some recently laid-off workers are worried about finding new jobs as the economy cools.

Two days before Christmas, Connor Crouch, a sales team member at a tax preparation service in Montclair, Calif., lost his job without warning. While he looks for new work, Crouch plans to expand on his side hobby, selling trading cards for extra income. But without a college degree, he said he will have a hard time finding a new job that pays as well and worries that he will struggle to afford basic needs for his three children, including a 3-month-old.

“It’s bad timing for sure. Money moves extremely fast in this current economy if that makes sense,” Crouch said. “If I can get an interview, I will nail it, but the hard part is securing the interview.”

Rachel Siegel contributed to this report.