Jobs on a Solid Track in December
How did the U.S. labor market fare in the final month of 2007? Job growth through the month was probably a tad stronger than many economists may have expected. Action Economics expects the government's employment report for the month, scheduled for release Jan. 4, will show a 70,000 increase in nonfarm payrolls, slightly above economists' median forecast of a 66,000 rise.
The aggregate payroll gain should be held back by a decline in manufacturing, construction, retail, finance, and temporary employment, while most other industries reveal healthy growth.
The unemployment rate is expected to hold at 4.7% (median 4.8%). The average workweek is expected to remain at 33.8 hours. Average hourly earnings are expected to increase 0.3% (median 0.3%), which should leave 3.6% year-over-year earnings growth, vs. 3.8% in November.
Our nonfarm payrolls forecast held steady after the release of the December ADP Employment survey on Jan. 3. The ADP survey showed a gain of 40,000 for December, which translates to an 80,000 nonfarm payroll gain if you assume a combined 40,000 contribution from government job growth, which is not counted in the ADP survey, and the ADP "bias"—the degree to which this measure typically trails the government's nonfarm payroll figures.
Downside Risk for Payrolls
Recent elevated readings from weekly jobless-claims data imply downside risk for payrolls. The drop in U.S. initial claims of 21,000 in the final week of December was hardly encouraging, given that it accompanied an 8,000 boost to the prior week's reading. The mix leaves a 344,000 average thus far for the month that is the highest month average since October, 2005, when the labor market was roiled by Hurricanes Katrina and Rita. And continuing claims have now surged by a jumbo 123,000 over the last two weeks, leaving these figures in line with the 2005 post-hurricane surge.
It is difficult to put much weight on the weekly claims data through the volatile holiday period, but this deteriorating trend, alongside weak ISM manufacturing figures released Jan. 2 (BusinessWeek.com, 1/2/08), creates a scenario that might exacerbate the market reaction to downside surprises in Friday's jobs report.
For Federal Reserve policymakers, even strong job growth in December could be seen as consistent with a quarter-point interest rate cut at the Jan. 30 FOMC meeting. A weak report could raise the risk of an emergency rate cut before then or a jumbo 50-basis-point move at the meeting.