You can forget about the mild disappointment in the headline. The details of the December jobs report were highly encouraging, suggesting the labor market is at last behaving more like it did in the pre-crisis era. There were various signs of lingering labor market slack declining, but the big news was the rise in wages. This looks like a vindication for the Yellen Fed – both its patient approach thus far and its warnings about multiple rate hikes over the course of 2017.
Growth in average hourly earnings (AHE) for all employees accelerated to 2.9% from 2.5%. This is the fastest rate since June 2009, and comes on the heels of AHE hitting post-2009 highs in 4 of the last 6 months. After moving sideways for several years, the 3-month average for this series rose continuously throughout 2016, without any retracements.
Turning back to the headline figure of 156,000 net jobs created, this was below the 175,000-180,000 predicted by private-sector economists, but nothing to worry about. It bears repeating that 20,000 is modest relative to the monthly volatility in this report and that economists estimate we only need to see 60,000-100,000 to keep unemployment falling. Even with net upward revisions to the prior two months, the 3-month average of nonfarm payrolls declined only about 20,000 from its previously estimated level to 165,000. If anything, it is slightly concerning that job growth is not moderating more rapidly toward that breakeven rate, now that we are so close to full employment. With unemployment already low, that means the Fed is going to grow increasingly concerned about the inflation outlook – especially given the pick-up in wages.
Also of note, this headline figure is in line with the December ADP report (private payroll growth of 153,000). Since ADP recently changed its methodology, analysts are re-evaluating its relationship with government figures. While it is still far too early to reach any conclusions, this was certainly a good month for ADP’s reputation as a leading indicator.
The industry breakdown for payroll growth had a few interesting points. Manufacturing had a good month (17,000 vs. -7,000 prior) and healthcare & education had a great month (70,000 vs. 43,000). Some of the biggest slowdowns came in retail trade (6,000 vs. 20,000), consistent with reports of a lackluster holiday sales season, and professional & business services (15,000 vs. 65,000), including temporary help (-16,000 vs. 24,000). If wage inflation continues to accelerate and temporary help upholds its reputation as a leading indicator, a little weakness in this area might not be such a bad thing.
Turning to the household survey, there was another nominal disappointment in the headline, but the details were quite encouraging. The unemployment rate retraced to 4.7% from 4.6% after an unusually large move last month (about thrice the average monthly change over the prior six months). This was widely anticipated, in part because the prior time such a large decline occurred (May 2016), it was mostly reversed the very next month.
It was in the slack measures that the household survey offered cheer for the job seeker and further vindication for the Fed. While the ranks of the unemployed swelled by 120,000, this also pushed the labor force participation rate up to 62.7% from 62.6%. A little encouragement for the jobless to re-launch their job searches (and thus get counted as participating but unemployed) is a good thing. Meanwhile, stubbornly high long-term unemployment declined (-25,000), as did the number of people forced to settle for part-time work (5.6 million vs. 5.7 million). The latter brought down the underemployment rate (9.2% vs. 9.3%), reducing the difference between this rate and the unemployment rate to its lowest level since 2009.
The Fed will take comfort from numbers like these that its well-telegraphed December rate hike hasn’t upended any apple carts yet and that its patient approach seems to have helped the labor market. Where other public servants sometimes work themselves out of a job, though, the Fed has worked itself straight into another one: the combination of rising wages, low unemployment, and still-robust job growth means it will have to follow through on multiple rate hikes this year, barring any disruptions linked to the presidential transition. Clearly, it will take more time to assess how the rest of the economy has absorbed the latest hike and how changes in the outlook for fiscal and trade policy may affect the outlook for economic growth as a whole. Those large caveats notwithstanding, this is the first year in recent memory that this Fed watcher has found the Fed’s optimistic year-end projections to look credible.