December Jobs Day Preview: Risks of a Rising Unemployment Rate

Expectations for the final employment report of 2024 are for nonfarm payroll employment to grow by 154,000 (a drop from last month’s 227,000) and the unemployment rate to stay steady at 4.2%. These expectations are consistent with a stable labor market essentially at equilibrium. This would be consistent with several recent strong economic data points, especially higher-than-trend real GDP growth. But there are warning signs that the U.S. labor market is actually facing greater risk than meets the eye.

One warning sign is that the unemployment rate has been deteriorating a bit more than headlines suggest. Bureau of Labor Statistics (BLS) conventions around rounding may have led observers and market participants to miss recent rises. In November, the official reported unemployment rate, which is rounded to the nearest tenth, was 4.2%, after being at 4.1% in both September and October. Such a small 0.1 percentage point tick up in the unemployment rate over a single month would normally not be substantial. But two months in a row of lucky rounding has made the deterioration of the unemployment rate appear half of much as it actually was. In September, the unrounded unemployment rate was 4.051%, which rounded up to 4.1%. In October, the unemployment rate rose to 4.145%, which rounded down to 4.1%, giving the appearance of a flat rate even though in fact the unrounded rate had risen almost 0.1 percentage point. In November, the unemployment rate rose again to 4.246%, another 0.1 percentage point rise and another round-down in the level of the unemployment rate. The unemployment rate is now less than a hundredth of a percentage point away from its July 2024 level, which itself had been the highest since October 2021 (see Figure 1).

The recent patterns of unemployment rate rises, the close rounding of October and November, and the sogginess of JOLTS measures of labor market momentum like hires, quits, and job openings, means that the risks around the unemployment rate in December are skewed more to the upside (higher change of a rise than a fall) rather than being symmetric (equal chance of rise or fall). To illustrate this, we calibrate a simple statistical time series model of the unemployment rate against lags of itself as well as information from lags of JOLTS hires, quits, layoffs, openings, and household survey transitions between labor market statuses (see the Appendix for a fuller description). Using data through November 2024, we use the model to forecast different outcomes for the rounded unemployment rate in December. As Figure 2 below shows, the model sees only a 20% chance that the (rounded) unemployment rate stays at 4.2%, and only a 10% chance that it falls below 4.2%. Meanwhile, there’s a 70% chance that the (rounded) unemployment rate rises, with a 50% chance alone that it hits either 4.3 or 4.4%.

Another warning sign is that cyclically-sensitive industries are no longer driving the majority of payroll employment growth. We use a model described in the appendix to classify each detailed industries in the establishment survey as either cyclical or acyclical, based on each industry’s pre-pandemic sensitivity to the business cycle a year ahead. Over the three months ending in November, cyclical sectors added an average of 78,000 jobs a month, while acyclical sectors added 95,000 jobs a month (see Figure 3). As the figure shows, it’s not out of the ordinary for cyclical sectors to fall short of acyclical sectors. This happened in 2007 and it signaled the end of the business cycle, even though cyclical industries still saw positive growth for much of the year. The signal now may not be quite so dramatic—other economic data such as GDP growth are wholly inconsistent with a recession at the moment—but it does at least support the notion that the labor market is in a more precarious position than even a year ago.

A lurch in the unemployment rate would come at a particularly sensitive time for federal policymakers. The new Congress and new Administration are beginning talks on a series of fiscal policy proposals under the assumption of low recessionary risk. The discussions include potential policies that could hurt growth in the near term, including a substantial rise in tariffs and a crackdown on immigration. Meanwhile, on the monetary policy front, the median participant on the Federal Open Market Committee (FOMC) has backtracked on the number of appropriate 2025 rate cuts, going from a forecast of four at the September meeting to just two at the December meeting. This revision was driven in large part by worries that inflation is proving stubborn and tenacious, coupled with more comfort that the labor market is healthy.

A sudden rise in the unemployment rate could be a narrative shock on both fronts. Fiscal debates will take on a very different tone in both substance and urgency if labor market anxieties are heightened. Congress would have to pivot from its planned debate over the extension of the 2017 tax cuts to a different debate over appropriate fiscal support for the economy. The Federal Reserve would arguably face an even tougher challenge, since the December FOMC meeting laid bare how worried the Fed is that inflation progress has a stalled out before reaching the 2% target. The Fed would be caught between the risks of re-igniting inflation by easing too quickly or driving joblessness by staying too tight. Markets would have to once again reassess the balance of risks in the US macroeconomy, which could cause short-run turmoil especially in equity markets.

December of course won’t be the final word on the US labor market. In particular, the January report to be released in early February will include important revisions. And even a rise in the unemployment rate of 0.2 or 0.3 percentage points in December would still leave it at a relatively low level. Nevertheless, the labor market will merit close attention throughout 2025.