Despite several rate hikes throughout the second half of 2022, the labor market finished the year strong. Very strong, according to the latest jobs report. And that could spell trouble for the housing market in 2023 as the Federal Reserve looks to bring inflation down through aggressive interest rate hikes.

Total nonfarm payroll employment rose by 223,000 jobs from November to December, according to data released Friday by the Bureau of Labor Statistics. Overall, employment was up by 4.5 million jobs in 2022, compared to 6.7 million jobs in 2021. There are more Americans working today than at any other time in history, and the Federal Reserve has made clear in recent months it expects to see a cool-down in the American workforce in 2023.

Many Fed officials have turned their attention from inflation readings to the labor market, concerned that inflation could settle at higher-than-hoped levels as wage growth climbs. The Friday report suggests that the Fed’s series of rate hikes since March have yet to significantly slow hiring, and more hikes may be in order.

With the rise in the number of jobs in December, unemployment dropped 0.2 percentage points from the month prior to 3.5%, with 5.7 million persons unemployed. The unemployment rate has hovered between 3.5% and 3.7% since March of 2022.

“The December jobs report showed only a gradual deceleration in the pace of job growth and a small decline in the unemployment rate,” Mike Fratantoni, the chief economist and SVP of the Mortgage Bankers’ Association, said in a statement. “The one sign of softness was a reduction in wage growth, now at 4.6% on a year-over-year basis. Although there are an increasing number of high-profile layoffs, particularly in the technology sector and also in the mortgage industry, hiring in other sectors of the economy are more than offsetting these on net. Additionally, November data showed that there were still more than 10 million job openings in the economy.”

The lion’s share of the job growth in December came from gains in the leisure and hospitality sector (up 67,000 jobs), the health care sector (up 55,000 jobs), and the construction sector (up 28,000 jobs).

The construction sector’s large increase is thanks to a sizable gain in the number of specialty trade contractors which added 16,600 jobs. The number of nonresidential building jobs again outpaced the number of residential building jobs added, at 5,800 jobs versus 3,100 jobs.

“Residential building construction employment increased by 0.3% month over month, while non-residential picked up by 0.7%,” Odeta Kushi, the deputy chief economist at First American, said in a statement. “Residential building is up 8.3% compared with pre-pandemic levels, while non-residential building remains 3.1% below.”

In total, the construction industry added an average of 19,000 jobs per month in 2022, slightly higher than the monthly average of 16,000 jobs in 2021, according to the jobs report.

“There are lots of homes under construction, and you need more hammers at work to build more homes,” Kushi said. “But the slowdown in single-family homebuilding will likely stall future growth in residential building jobs.”

After gaining 13,000 jobs in November, the real estate and rental and leasing industries gained 7,700 jobs in December, with real estate adding 4,000 jobs and rental and leasing services gaining 3,700 jobs.

In February 2020, a combined 300,000 were employed in “real estate credit” and as mortgage and nonmortgage loan brokers. As of November, there were roughly 377,600 people in those jobs, suggesting that the industry still has a large number of cuts to make in the coming months as the housing market slows to a crawl.

According to the latest BLS statistics, mortgage banking companies cut 7,200 jobs in November. Nearly 42,000 jobs have been shed by mortgage banking firms over the last year, according to the BLS. Mortgage brokerages, meanwhile, shed about 2,300 jobs in November.

While the Federal Reserve announced in early December that it may consider slowing interest rate growth, it may reconsider after December’s jobs report numbers.

“Higher-than-expected job growth also means that the Federal Reserve will assuredly continue to raise rates this year in order to bring inflation down to its 2% target,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement. “The challenge will be to target inflation without missing signs that the labor market is becoming more precarious. Right now, though, the labor market still appears to be running strong.”

Kushi added: “For the Fed, while there is good news on the inflation front – signs of deceleration in goods inflation and evidence that housing has peaked – the narrative around inflation has shifted to wages and the labor market. The supply and demand imbalance in the labor markets implies continued upward pressure on wages. The Fed will be watching for this gap to narrow and for the labor market to soften.”