How does labor market affect economy, if more jobs are being created and demand for labor is high, it tends to reaffirm the presence of an expanding economy.

The US economy added more jobs than anticipated in December, injecting optimism about the labor market's near-term strength. While uncertainty looms with the incoming Trump administration, it can be said that the new leadership steps into a robust labor market.

Nonfarm payrolls increased by 256,000 in December, marking the strongest monthly gain since March. However, monthly data can be volatile, making it beneficial to examine one-year changes for clearer insights. In this regard, payrolls rose by 1.4% compared to a year ago, aligning with the growth rate seen before the pandemic. The pressing question remains whether this growth rate can be a proof of market momentum.
 

Yearly Changes and Trends

The one-year change has been gradually easing in recent months, dipping to +1.42% in December. The positive news is that this decline is slow, indicating that the current pace of job growth is still healthy.

To provide another perspective, the rolling one-year change in total nonfarm payrolls adjusted for the unemployment rate also shows that the post-pandemic period is normalizing, with current readings closely matching pre-pandemic data. Nonetheless, this ratio continues to ease slightly, serving as a reminder that while job growth remains solid, the underlying trend suggests a late-cycle phase.
 

Private Sector Hiring

A more concerning trend is reflected in the year-over-year change in private payrolls relative to total nonfarm payrolls. Typically, this index is positive, indicating that private sector hiring predominates—accounting for about 85% of total payrolls. Thus, the hiring and firing decisions of companies play a crucial role in the business cycle, overshadowing the minor impact of government payrolls.

The recent negative trend in this metric points to relative weakness in private-sector hiring, a situation often associated with increased recession risk.
 

Current Economic Conditions

Despite these signs, the likelihood of a US recession remains low at present. The weak readings may partly stem from pandemic-related disruptions. However, they also suggest that the labor market could be more vulnerable than the latest monthly payroll figures indicate.

As we enter 2025, it’s premature to determine whether this will mark a turning point for the post-pandemic resilience in payrolls. If an early warning emerges, it may manifest as a more rapid and significant decline in the one-year comparisons.
 

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