Where labor marketing going 2024 (6 charts)

What this means is I'm in for a soft landing and you're not getting a raise.

Where the Job Market Is Heading in 2024, in Six Charts

Forecasters expect unemployment to edge higher and hiring to slow, which could aid the economy’s soft landing

By Jeffrey Sparshott, and Gabriel T. Rubin, WSJ

Jan. 1, 2024

The labor market has cooled, but as of November, it was still producing jobs at a faster pace than it was just before the pandemic. PHOTO: ERIC THAYER/BLOOMBERG NEWS

Employers slowed hiring and handed out smaller raises in recent months, signs of fading momentum in the job market that have some forecasters expecting unemployment to rise in 2024.

And that might be OK. The key for American workers and Federal Reserve policymakers is to have the labor market cool without collapsing. That would support household incomes while helping inflation drift lower, putting the economy on a glide path to a soft landing—as long as the slowdown isn’t too severe.

“You can see these small cracks forming” in the labor market, said Michael Pugliese, a senior economist at Wells Fargo. “That should give you reason for pause going into 2024.”

Here is where the labor market is heading in the new year.

Cooling trend

The U.S. labor market was a pillar of economic strength in 2023, with solid hiring and rising wages helping households navigate high inflation and an otherwise bleak view of the economy. It was also too hot for the Fed. Officials at the central bank worried that high demand for goods and services alongside a constrained supply of workers would push wages up too fast, fueling inflation.

Several factors combined to cool it off—to the point that economists expect hiring to slow considerably in 2024.

The Fed’s campaign of interest-rate hikes made it more expensive to borrow money, slowing some economic activity. Many industries that had struggled to find workers surpassed prepandemic employment levels, making hiring less urgent. People came off the sidelines and immigration picked up, adding to the pool of available workers.

By the end of 2023, workers had stopped job hopping as much, while employers hired less but kept layoffs low. The result was a less-frenzied labor market.

Concentrated hiring

Job growth also became more concentrated in a handful of industries: healthcare and social assistance (which includes private-sector child-care workers, home-care aides and social workers), leisure and hospitality, as well as state and local government. Outside those sectors, hiring slowed sharply and in some areas contracted.

The less dynamic labor market helped put a brake on rapid wage growth—a key consideration for the Fed. Average hourly earnings across the private sector rose at an almost 6% annual pace early in 2022 but cooled to 4% near the end of 2023. In sectors with the greatest competition for workers, such as restaurants, wage gains also eased substantially.

Wage pressures could still prove too hot for the Fed. Current pay gains still aren’t consistent with the central bank’s 2% inflation target, said Chris Varvares, co-head of U.S. economics at S&P Global Market Intelligence. That means job growth will have to slow further to bring the labor market into better balance.

Leisure and hospitality

“We think employment growth remains positive but too slow to absorb all entrants into the labor force,” Varvares said. That will push the unemployment rate to 4.1%, according to S&P forecasts, up from November’s 3.7% and the highest level since the end of 2021.

Temporary weakness

Another warning sign for the labor market: Temporary hiring has been on a downward slope for more than a year. Temps are considered a bellwether for the labor market. They are often the first hired as businesses start staffing up and the first dismissed when the economy sours.

“There’s a clear trend toward cooling,” said Andy Challenger, senior vice president at outplacement firm Challenger, Gray & Christmas. “We expect elevated layoffs into the first quarter and after that it could level off or get worse.”

Still, there are reasons for optimism. The labor market has cooled, but as of November, it was still producing jobs at a faster pace than it was just before the pandemic. Consumer spending has proven resilient, propelling demand for an array of goods and services—and the people who produce them. And companies, broadly, have been reluctant to lay off workers after they so recently struggled to find and keep them.

“Unemployment is unlikely to increase dramatically as companies shy away from firing workers,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said in a research note. “Labor shortages and the high turnover costs over the past several years mean firms are hesitant to let their workers go even as economic growth slows.”

Write to Jeffrey Sparshott at Jeffrey.Sparshott@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com