Written by Lucia Mutecani

WASHINGTON (Reuters) – The U.S. economy likely maintained a solid pace of job and wage growth in December, but rising borrowing costs as the Federal Reserve battles inflation could slow labor market momentum significantly by the middle of the year.

The closely watched employment report released by the Labor Department on Friday is also expected to show that the unemployment rate was unchanged at 3.7% last month. The job market has remained strong since the Federal Reserve set out last March to raise interest rates at the fastest rate since the 1980s.

Price-sensitive industries such as housing and finance, as well as tech companies including Twitter, Amazon (NASDAQ:) and Facebook (NASDAQ:Meta) have cut jobs, yet airlines, hotels, restaurants and bars are desperate for workers as leisure and industries continue. Hospitality in the recovery from the epidemic.

The resilience of the labor market has supported the economy by maintaining consumer spending, but it could prompt the Fed to raise its target interest rate above the peak of 5.1% that the US central bank projected last month and keep it there for a while.

“All indications are that the job market remains strong,” said Song Woon-soon, professor of finance and economics at the university.

Loyola Marymount University in Los Angeles. “Entertainment and hospitality employers are not able to get anyone even after the wages go up. This pattern has been going on and will continue for a while, so this is where the rubber hits the road.”

The business survey is likely to show that non-farm payrolls increased by 200,000 jobs last month after rising by 263,000 jobs in November, according to a Reuters poll of economists. That would be the smallest gain in two years.

However, job growth will far exceed the pace needed to keep pace with growth in the working-age population, comfortably in the 150,000-300,000 range that economists associate with narrow labor markets.

Estimates ranged from the 130,000 to the 350,000 predicted by TD Securities.

Data from payroll-scheduling and tracking company Homebase showed employers retained workers in December, indicating a smaller-than-usual decline in non-seasonally adjusted (NSA) terms.

seasonal boost

“This means that the seasonal factor, which should be adjusted for more than 200,000 declines in the NSA, will add more than the expected number,” said Oscar Munoz, macro strategist at TD Securities. “Seasonally adjusted has added about 430,000 jobs on average over the past five years,” he added.

An ongoing strike by 36,000 teachers in California is seen as straining government salaries. The government will review the seasonally adjusted household survey data, from which the unemployment rate is derived, for the past five years.

Household workers fell in October and November, leading some economists to speculate that overall job growth was overstated. Some Fed officials also focused on the difference between the two measures.

However, the household survey tends to be volatile and most economists expect household workers to adjust towards non-farm payrolls.

Veronica Clark, economist at Citigroup (NYSE:) in New York. “We wouldn’t be surprised to see a larger rebound in domestic workers in December or over the coming months.”

No significant effect on the unemployment rate was observed from the review of household data. Average hourly earnings are expected to rise 0.4% after rising 0.6% in November. This would reduce the annual increase in wages to 5.0% from 5.1% in November.

Strong wage growth is likely to continue in January, as several states raise minimum wages and most workers across the country receive cost-of-living adjustments. There were 10.458 million vacancies at the end of November, which translates to 1.74 jobs for every unemployed person.

But the trend in employment growth could slow significantly by the middle of the year. The Fed raised its policy rate last year by 425 basis points from near zero to a range of 4.25%-4.50%, the highest since late 2007. Last month, it forecast at least an additional 75 basis points of increases in borrowing costs by the end of 2023. .

Trust among CEOs is at its lowest level since the Great Recession, according to a recent survey by the Conference Board.

“If they think demand is weakening and revenues will slow, they will likely feel pressure to cut costs to maintain profitability,” said James Knightley, chief international economist at ING in New York. “This suggests that the pace of employment growth is likely to slow very quickly this year, and we could, in fact, start to see some job losses in the middle of the year.”