Some Lessons From the 2023 Labor Market

With the December jobs report coming out earlier this month, we now have a full (albeit, preliminary) look at the 2023 labor market. This seems like an opportune time to see how some of last year’s big jobs-related market stories held up (or didn’t)—which can hold instructive lessons for investors, in our view.

Nonfarm payroll employment rose by 2.7 million in 2023 (an average monthly gain of 225,000), which was lower than 2022’s 4.8 million but above the 2.2 million annual average during the prepandemic 2010 – 2019 economic expansion.^[i] The private sector added 2.0 million jobs (fewer than 2022’s 4.5 million) while public sector payrolls rose by 672,000 (up from 2022’s 275,000). Most major industries added jobs last year, led by education & health services (1.1 million) and the government, with state and federal levels rising 239,000 and 91,000, respectively. The information industry lost jobs overall (-69,000) as Tech layoffs continued (more on this shortly).

On the Household Survey side of the report—the section yielding the unemployment rate—things were mixed. The official unemployment rate (U3) and broadest measure of unemployment (U6) didn’t deviate much from 2022’s levels, and both remained well below their prepandemic averages. (Exhibit 1)

Exhibit 1: Recent Unemployment Rates Compared to Prepandemic Averages

Source: FactSet, as of 1/12/2024. U3 and U6 unemployment rates, monthly, December 2021 – December 2023. Long-term averages represent monthly average from January 2010 – December 2019.

The labor force participation rate—which measures the percentage of the population that is either working or actively looking for work—was up overall from 2022’s levels, suggesting people have been returning to the job hunt as the economy grows. That said, the latest rate remains below its monthly average from 2010 – 2019. (Exhibit 2)

Exhibit 2: Labor Force Participation Rate and its Prepandemic Average

Source: FactSet, as of 1/12/2024. Labor force participation rate, monthly, December 2021 – December 2023. Long-term average represents monthly average from January 2010 – December 2019.

Wage growth, in contrast, was well above its prepandemic average. (Exhibit 3)

Exhibit 3: Wage Growth and its Prepandemic Average

Source: FactSet, as of 1/16/2024. Average hourly earnings, year-over-year change, December 2021 – December 2023. Long-term average reflects January 2010 – December 2019.

2023’s above-average wage growth ties into a widely discussed concern last year: A tight labor market would drive wages higher, thereby keeping inflation elevated. We always thought this thinking was false, and 2023’s data are the latest to support that view. Wages did keep rising, helping households continue overcoming 2022’s price spikes. Headline wage growth topped 4.0% y/y all year, though it slowed from 4.4% in January to 4.1% in December (with a high of 4.7% in February). But higher wages didn’t send prices higher anew. Inflation slowed throughout the year, finishing 2023 below the wage growth rate. (Exhibit 4)

Exhibit 4: Wage Growth and Inflation

Source: FactSet, as of 1/12/2024. Average hourly earnings and headline CPI, year-over-year change, December 2021 – December 2023.

Another popular worry: Rising unemployment would be collateral damage of the Fed’s inflation fight. Fed rate hikes brought the benchmark range from 0.25% - 0.50% to 4.25% - 4.50% in 2022 and then to 5.25% - 5.50% by July 2023. Despite that “tightening,” hiring continued apace. Yes, monetary policy hits with a lag—anywhere from 6 – 18 months or so. But after nearly two years of rate hikes, we should probably have started seeing bad data by now. That hasn’t happened.

Despite a new year, these worries haven’t disappeared. Some are still waiting for rate hikes to deter hiring. Others think wage growth’s slowdown will hit consumer spending in 2024, weighing on GDP growth. But the wage growth fear morph says more about negative sentiment than what it poses as a true economic threat. Consider: Last year, quicker wage growth was supposedly negative because it would lead to rate hikes … which would supposedly hurt growth. Now, slowing wage growth is bad because consumers won’t spend as much … supposedly also hurting growth. Which is it?

Beyond those high-level worries, a review of sector and industry labor trends dispels other 2023 fears. For example, headlines fretted labor shortages in certain areas, notably healthcare. Yet healthcare added the most employees last year.^[ii] That doesn’t mean the shortage is over, but it is a sign of the market meeting labor demand.

What about industrial action? The United Auto Workers (UAW) went on strike from mid-September through October, spurring concerns of broader economic damage—and potential recession. However, the impact appears fleeting, if jobs data are any indication. Motor vehicles & parts payrolls fell by -32,000 in October—and rebounded by 31,000 the following month.^[iii] The Hollywood strike’s impact looks similarly short-lived. The motion picture & sound recording industries category lost jobs from June through October before adding them back in November and December—and ending the year having added jobs overall.^[iv]

Consider, also, the Tech sector. People feared the industry’s layoffs starting in late 2022 were a leading indicator of deeper problems. With so many anticipating recession in 2023, companies acted first and got lean and mean by putting expansion plans on hold, cutting some investments and, yes, laying some workers off—which amounted to a cost cut that supported earnings growth last year. That is hard on those affected and we don’t discount that. However, it adds to the industry’s resilience and is a big reason Tech stocks led all sectors in 2023, and we think Tech is poised to continue to outperform the broader market for at least the early part of this year.^[v] Note, too, 2023’s Tech outperformance occurred despite the information industry’s 2023 layoffs exceeding 2022 levels.^[vi]

What happened last year won’t determine what lies ahead. But the latest data suggest moods going into 2023 were more dour than warranted by reality. In our view, similar conditions exist today—a reason we are bullish in 2024.