All eyes will be on the December jobs report when it is released Friday morning, as investors look for clues about the labor market's health in the face of higher interest rates and still-high inflation.
The Labor Department's high-stakes December payroll report, due at 8:30 a.m. ET, is projected to show that hiring increased by 170,000 last month and that the unemployment rate inched higher to 3.8%, according to a median estimate by Refinitiv economists.
That would mark a decrease from the 199,000 gain in November and the average monthly gain of 232,000 recorded over the previous 12 months.
"As winter weather sets in across much of the country, the December employment report is expected to reflect a bit of a cooling trend," said Mark Hamrick, senior economic analyst at Bankrate.
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The Federal Reserve is closely watching the report for evidence that the labor market is finally softening after months of surprisingly solid job gains as policymakers try to ensure that inflation continues to ease. The consumer price index has cooled considerably in recent months but remains above the Fed's preferred 2% target, despite 11 interest rate hikes in the span of 16 months.
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Slower job growth and further moderation in wage gains on Friday could be a welcome sign for the U.S. central bank, which held interest rates steady for the third straight month in December. Most economists believe the central bank is finished with its tightening campaign and could begin to cut rates later this year.
Average hourly earnings, a key measure of inflation, are expected to increase 0.3% for the month and climb 3.9% from the same time one year ago.
"There is no denying that the disinflationary process has been faster and less painful than what Fed officials had been anticipating in early 2023," said Gregory Daco, EY chief economist. "If progress is sustained, lower inflation will favor policy recalibration in 2024."
The labor market has remained historically tight over the past year, defying economists' expectations for a slowdown. Although economists say it is beginning to normalize after last year's blistering pace, it is nowhere near breaking.
A separate report released Wednesday showed that job openings unexpectedly slowed to 8.79 million at the end of November, the lowest level since March 2021. Before the COVID-19 pandemic began in early 2020, the highest on record was 7.6 million. There are still roughly 1.5 jobs per unemployed American.
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The data points to a labor market that is cooling in the face of growing headwinds.
"The job market is cooling as illustrated by fewer openings," said Jeffrey Roach, chief economist at LPL Financial. "The Fed is likely in a sweet spot as they prepare markets for an upcoming cut in rates."
