December Nonfarm data casts doubt on January interest rate cut

The December Nonfarm Payrolls report was just released and it brought an unwelcome surprise. Instead of the expected 65,000 new jobs, the Department of Labor reported only 50,000 — a significant gap. However, this is just the tip of the iceberg. Looking back at the data from October and November, the market identified uncomfortable downward revisions, with a total of 76,000 jobs erased from historical data. As a result, for the entire year of 2024, the US added only 584,000 nonfarm jobs — the weakest increase since the 2020 pandemic. This figure clearly reflects the economic turbulence experienced over a volatile year.

Why is the employment data so weak?

Looking back at 2024, a series of unfavorable factors continuously impacted the labor market. Trade disputes, tariff policies, government shutdowns, high interest rate pressures — all these had negative effects on hiring demand. However, from an optimistic perspective, these “one-time” impacts are expected to diminish in 2025, creating conditions for less distorted macroeconomic data. But because of this, if upcoming data continues to worsen, the justifications will run out, potentially indicating real economic problems.

The private sector: where lies cannot be hidden

In December, the private sector contributed 37,000 jobs, while the government added 13,000. Although there was a slight increase in public sector contributions, this trend is unlikely to continue, as the “small government” policy remains the main direction, and the increase is also exaggerated due to small baseline data. What is truly noteworthy is the development within the private sector, which most accurately reflects the real situation.

The goods sector again weakened after a recovery, with a decline of 21,000 jobs. Construction was hit hardest — prolonged weakness due to high interest rates dampening real estate and cold winter weather hindering construction activities. However, if Trump truly implements the plan to purchase $200 billion in MBS, the entire real estate industry — from stocks and raw materials to the labor market — could have a comprehensive recovery opportunity.

Services sector: Revival or just seasonal effects?

This month, the services sector added 58,000 jobs. Although this is less than the 283,000 jobs added in the same period last year, it remains at a recent high, indicating signs of recovery. But is this truly a recovery or just a seasonal end-of-year effect? The reality is more complex. Different industries within services are not increasing uniformly — internal structures continue to diversify.

Taking retail as an example, this sector usually expands hiring toward the end of the year, but this year it continued its weak trend, decreasing by 25,000 jobs. In contrast, education and healthcare — more defensive sectors — are the main pillars, contributing 41,000 jobs alone. This is no coincidence: the polarization within the service industry has persisted for some time, reflecting that the resilience of current employment mainly comes from defensive factors rather than a broad economic activity rebound.

Stable working hours but rising hourly wages raise concerns

Regarding working hours in the private sector, December showed no significant change compared to previous months or the same period last year. This is a positive sign — companies are maintaining hiring levels, with no signs of a sharp reduction in hours (a typical recession indicator).

However, the situation with hourly wages is different. December saw an increase of 0.33% month-over-month and 3.76% year-over-year. These figures not only surpass the 2025 GDP growth forecast but also far exceed inflation targets. While year-end wage increases are common, this year’s rise is more pronounced. This creates a paradox: good for consumer spending stories but unfavorable for inflation outlooks and interest rate cut expectations, especially for hourly workers and those sensitive to labor costs.

Unemployment rate: a fragile “stalemate”

In November, the unemployment rate unexpectedly rose to 4.6% (adjusted down to 4.5%) due to a sudden increase in job seekers. But December reversed this trend — the number of job seekers decreased, and the unemployment rate fell accordingly to 4.4%.

The current picture is one of a “stalemate”: businesses are neither expanding nor laying off, employees are neither quitting nor switching jobs — both sides are waiting. Is this a good sign? Not necessarily. Because this balance is extremely fragile. Recall last year’s wave of layoffs in October-November, driven not only by AI impacts but also by tightening macro liquidity. If in the near future liquidity tightens again or corporate revenues decline, the labor market could face renewed downward pressure.

Conclusion: January rate cut — almost zero probability

Although the weaker-than-expected December Nonfarm data seems to increase the chances of a rate cut, the two key factors that truly influence the Fed’s decision are the unemployment rate and wage growth pace. On these two fronts, the unemployment rate has stabilized, but wage growth has surged — this combination makes the probability of a rate cut in January nearly zero.

However, the US stock market should not rely too heavily on Fed support. In Q1, or even Q2 this year, the market will need to stand on its own — relying on AI stories, corporate profits, or recovery in valuation. This is different from Q4 last year, when the market was overly dependent on rate cuts and liquidity easing stories. A market built on solid fundamentals will be healthier and more sustainable.