A Red Flag from the Jobs Report?

Strong wage growth may capture the attention of inflation-wary Fed policymakers

The figures in the December employment report came in mostly as the Street expected: nonfarm payrolls dropped 124,000, while the unemployment rate rose to 5.8% from a revised 5.6% in November. And the average workweek to improved to 34.2 hours from 34.1 hours.

But there was one big surprise in the report. Hourly earnings rose an impressive 0.5% on the month. The December figure, combined with an upward revision to November's data, left hourly earnings, on a non-seasonally adjusted year-over-year basis, rising at a solid 4.3%. Though the market isn't focused on inflation, the firm wage figures may ultimately prove the most important take-away from the report for the Federal Reserve policymakers.

Among the industries, weakness was driven by another hefty decline in manufacturing (a loss of 133,000 jobs), transportation & utilities (down 36,000), and retail trade (lower by 77,000). This was partially offset by gains in services (up 72,000) and government (higher by 63,000). Overall, the report had a firmer tone than expected, which supports the view that labor market conditions appear to be stabilizing.

Nonetheless, the data were still depressed by the same three factors seen over the past few months: ongoing weakness in manufacturing and temp employment, continued declines in travel-related businesses following the September 11 attacks, and lackluster holiday-related hiring.

From Standard & Poor's Global Markets

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