Despite a fair amount of noisiness, the December employment report is actually a decent portrait of the U.S. labor market. Grains of salt need to be applied to several of the particulars, yet the overall impression of an uneven but resilient job market rings true. While payrolls continued to expand at a steady pace, low-wage industries outpaced high-wage ones, and service-providing sectors were resilient in the face of weak goods-producing sectors (in yet another parallel with the 2015-2016 slowdown). This report will stiffen the Fed’s resolve to remain on hold, not just because of the resilience in payrolls and the disappointing (albeit calendar-depressed) wage growth, but also because of signs that labor market slack is still declining.
- Payrolls growth slowed to 145k, with only 14k in downward revisions to prior months, leaving the 3-month average at 184k (from a previously reported 205k).
- Unemployment held steady at 3.5%, a 50-year low.
- Wage growth fell back to 2.9%, down from November’s 3.1%.
- Job growth remains on pace: Even if you zero out the anomalous-looking retail number, the 3-month average on payroll growth would drop only slightly, to 169k from 184k. That’s still comfortably above the level needed to keep the unemployment rate (and other measures of slack) declining.
- Manufacturing suffered more than most: payroll growth swung from +58k to -12k, and the breadth of sub-industries that were expanding plunged from 65.8% to 44.7%
- Transportation/warehousing’s drop-off (-10.4k versus 11.9k prior) may reflect collateral damage from manufacturing, but it could also reflect the way the BLS survey methodology can conflate e-commerce retail facilities with traditional warehousing jobs.
- Slack is still declining. Part-time employment dropped by 140k, driving the "U-6" under-employment rate down to 6.7% from 6.9% – in notable contrast to the stable unemployment rate. Long-term unemployment dropped by 33k, and there was a 118k drop in job losers plus completed temp assignments. Also of note, the prime-age employment-to-population ratio continued to rise (to 80.4% from 80.3%). With all that good news, no wonder more workers felt confident enough to quit (job leavers rose by 53k).
- Wage growth slowed but was likely depressed by a calendar quirk, and possibly a shift in the composition of either industries or occupations. The concentration of job gains among lower-wage industries was notable in December: leisure/hospitality, retail, and healthcare/social assistance contributed a combined 82% (115k of the 140k) in private service-providing payrolls. There was a sharp plunge for both non-managers and all employees, but there’s only a two-month trend decline for the former, versus a five-month trend for the latter. The fourth-quarter Employment Cost Index, which controls for composition effects, will be closely watched for further light on this.
- Noisiness was evident in several key areas of the report. Growth in payrolls for health care and social assistance fell off to 33.9k from 63.8, even though that's a famously stable sector. The 3-month average of 45k in seems closer to the truth. Also, retail trade growth jumped to 41.2k from -14.1k, despite the fact that holiday hiring normally drops off in December. And of course, well-known calendar effects very likely depressed both the payrolls and wages.