Nonfarm Payrolls Dampens Expectations for a January Rate Cut

December Nonfarm Payrolls

The court unsurprisingly postponed its decision, and Trump, as expected, started stirring things up. Last night, he suddenly posted and leaked the nonfarm payroll data ahead of schedule. It's important to note that nonfarm payrolls are arguably the most influential macroeconomic data for the current stock market. So, what impact does Trump’s move have on the market? And what insights can we gain from such critical nonfarm payroll data? Next, let’s take a deep dive into this month’s nonfarm payroll report.

According to the Department of Labor, December saw an increase of 50,000 nonfarm jobs, lower than the expected 65,000. Additionally, the data for October and November was significantly revised down, with a combined downward adjustment of 76,000 jobs, most of which was for October. The total number of new nonfarm jobs for the entire year was only 584,000, marking the weakest level since the 2020 pandemic.

Undoubtedly, 2025 is shaping up to be a dramatic year. First, there were tariffs and trade wars, followed by government shutdowns, rate cuts, and tightening liquidity. All these factors, to varying degrees, have led to weak employment. On the bright side, these one-off disruptions will gradually fade this year, and the noise affecting macro data will be greatly reduced. On the downside, if economic data faces problems going forward, there will be no more excuses, and it could signal real economic trouble. Let's set this aside for now and look at the industry situation.

In December, the private sector contributed 37,000 jobs, while the government added 13,000. Compared to the same period last year and last month, the government's share has increased slightly. This may be a disruptive factor, or it could be a continuation effect after the government reopened in mid-November. However, I don't think this trend will continue. Firstly, the total numbers are small, which exaggerates the government’s share. Secondly, the direction towards a smaller government has not changed, and it is unlikely the government will massively expand hiring. Therefore, our focus should be on the private sector, which better reflects the true state of the market.

In the private sector, the goods-producing side, after just recovering in November, fell back into weakness, dragging down employment by 21,000 jobs this time. The biggest impact here was from the construction industry. The continued weakness in construction is not only due to the high interest rate environment suppressing real estate development, but also because cold winter weather has hampered construction activity. However, if Trump pushes through the $200 billion purchase of MBS, this could benefit the entire real estate sector, including stocks, raw materials, and the job market. It might fully recover in the near future, and I will continue to watch this closely.

Meanwhile, the service sector contributed 58,000 jobs this month. While this is not as dramatic as the 283,000 jobs added during the same period last year, it is still at a relatively high recent level, showing some recovery.

But is the recovery in the service sector due to the year-end holiday season? It used to be, but things are different now. Not only has there not been a broad-based increase in service sector employment, but the internal structure continues to diverge. For instance, retail, which usually increases hiring at year-end, continued its weak trend this month, dragging down employment by 25,000 jobs. Meanwhile, education and healthcare continue to carry the sector, with 41,000 jobs added by this segment alone.

Looking at last year’s data, the divergence within the service sector is not accidental. This structure has persisted for some time, especially for defensive industries like education and healthcare, which consistently stand out in both major and minor nonfarm payroll reports.

This shows that the current resilience in macro employment mainly comes from counter-cyclical support, rather than a broader recovery in business activity. From a micro-investment perspective, pro-cyclical service industries might now be at a cyclical low, making it a more cost-effective choice to position in these sectors early.

Continuing down the table, there was no significant change in private sector working hours in December compared to the past or the previous year. This indicates that companies are still in a wait-and-see mode regarding current labor efficiency, and there has not yet been a large-scale reduction in working hours—a typical precursor to a recession.

However, there are some concerns about hourly wages. Looking at the data, average hourly earnings rose 0.33% month-on-month in December, and 3.76% year-on-year. This set of data not only exceeds the expected GDP growth rate for 2025, but is also well above inflation.

Historically, there is a tendency for wages to rise at year-end, but this year’s increase is more pronounced. This is not favorable for the inflation and rate cut narrative, but it does provide some support for consumption.

Finally, let’s turn our attention to the unemployment rate.

Last month, the sudden increase in people looking for jobs led to a passive rise in the unemployment rate by 0.2% to 4.6% (later revised to 4.5%). But in December, the situation reversed: fewer people were looking for work, and the unemployment rate dropped to 4.4%.

This indicates that the labor market is currently in a “cold war” mode—if you’re not looking for me, I’m not looking for you. Both employers and employees are relatively passive; companies are neither expanding nor downsizing, and workers aren’t quitting or changing jobs. In a word, it’s a stalemate.

Is this a good thing? Not really. Although it’s currently balanced, it’s also very fragile. Think back to the wave of layoffs in October and November last year—beyond the AI factor, part of the reason was the indirect impact of tightening macro liquidity. So, going forward, if fiscal policy drains liquidity again, or if corporate revenues worsen, it could once again negatively impact employment.

Jason believes that although December’s nonfarm payroll numbers fell short of expectations, seemingly increasing the odds of a rate cut, the factors that will truly influence the Federal Reserve are the unemployment rate and wage growth. Regarding these two points, the unemployment rate has been contained while wage growth is spiraling upwards—this double pressure has essentially brought the probability of a January rate cut to zero.

But it doesn’t matter. As we’ve mentioned several times in previous episodes, the US stock market in the first quarter—and even the second quarter—will have to rely on itself. The market never really expected the Federal Reserve to step out and support stocks. Right now, the US stock market is more dependent on the AI narrative, corporate profits, or value investing. It won’t rely as heavily on the rate cut narrative and loose liquidity as it did in the fourth quarter last year. Such a market is actually healthier and more sustainable.