A Chilly December for the Labor Market

The paltry job growth seen in the month's employment report means the Fed can take its time on raising interest rates

The conventional wisdom of economists was again confounded by the December employment report, released Jan. 9. The headline nonfarm payrolls measure grew by a paltry 1,000 -- in contrast to expectations for job growth of between 150,000 to 175,000. The jobless rate fell to 5.7% from 5.9%. And revisions of previous data didn't provide much cheer, with job gains for November revised downward to 43,000 from a prior figure of 57,000.

Factory employment fell 26,000 in December (near flat expected), and retail employment was down 38,000, not enough to make up for the miss. This is two months in a row of disappointing job gains -- not a good sign. Hourly earnings rose 0.2%, as expected). The average workweek came in at 33.7 hours, vs 33.9.

December is the second month in a row in which the reported job rise was weaker than economists' expectations by over 100,000. The cumulative miss in the two months is about 250,000 jobs. Factory hiring was about 25,000 weaker than the median expected in Informa's survey of economists. For the two months, factory employment was 35,000 to 50,000 weaker than hoped.

Private hiring has slowed for three months running, after cracking above 100,000 in the final month of the third quarter. The broadest measure of private sector labor activity - private aggregate hours - is up only about 0.1% at the end of the fourth quarter compared to the end of the third, after a decent start at the end of the quarter.

We at Informa can offer only one mitigating thought. The data may simply be skewed by the strength of third-quarter growth and the messy seasonal factors of the fourth.

Meanwhile, the drop in the jobless rate continues a pattern of signaling stronger labor market conditions than are seen in the job growth data. In December, this is because the workforce fell by 309,000 people, while the number of employed fell by only 54,000. Fed comments pretty clearly suggest policymakers are going to stick with establishment data -- numbers provided by businesses and instituions -- for the most part.

Note that aggregate hours worked fell 0.6% in December, nearly erasing the cumulative 0.7% rise earlier in the quarter. Productivity gains will be substantial in the fourth quarter. Temporary help gained 30,000 jobs. This leading indicator of permanent hiring remains fairly firm, but in itself does not account for the lack of jobs growth elsewhere, even when looking at employment outside the retail sector.

One other figure to note: Average hourly earnings in December, up 2.0% year-over-year, is well off the 3.1% growth rate seen in July. By sector, wages were up 2.2% in the goods producing segment, with the sub-factory component up 2.3%. Yearly wage growth in nondurables was up at a higher 2.8% rate but well off the 3.4% pace in July 2003. Hourly pay in the overall services sector matches the headline 2.0% year-over-year pace but is down from 3.2% six months ago. This data further underscores the Fed's stance that it can take its time on rates, with core inflation so low.

From Informa/MMS staff analysts

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