December Jobs Report and November Trade Deficit

KEY DATA: Payrolls: +148,000; Private: +146,000; Revisions: -9,000; U-Rate: 4.1% (Unchanged); Wages: +0.3%/ Trade Deficit: $1.6 billion wider

IN A NUTSHELL: “While the headline job gain number may have disappointed, the average over the last three months was still very strong.”

WHAT IT MEANS: We are starting to get the final 2017 data with the first big one being the jobs numbers. To many, the 148,000 jobs created was a disappointment. But this is a classic example of why you need to understand the pattern of the data, not just look at headline number. Yes, there were fewer positions added than many had forecast, but the jobs numbers are volatile. Over the last three months, an average of 204,000 new positions were created. That is very strong job growth that is likely not sustainable. In December, the job gains were led not just by health care, but also by robust increases in construction and manufacturing. These sectors are helping carry the load and show that the fundamental economy is in good shape. They also offset a large decline in the faltering retail sector.

A second reason to be confident about the economy is the unemployment rate, which remained at an extremely low 4.1%. As a result, wage increases are picking up. The 2.5% increase over the year may not be as high as most workers would like, but it is getting there. The stable participation rate is also a good sign. It is likely that a growing number of people are entering the workforce as to offset the rising boomer retirement rate. Still, with the labor force expanding at a modest 0.5% pace over the year, it will be hard to maintain strong job and economic growth for a sustained period.


While the trade deficit widened again in November, it did so for all the right reasons. The world economy is finally in synch and that means we have growing markets across the world. Exports expanded solidly with every major category posting gains. The rise was not simply due to increasing petroleum prices. But the strong U.S. economy is also sucking in goods from the far corners of the world and as is usually the case, doing so faster than we can sell to foreigners. The only category of imports that was down was food.

MARKETS AND FED POLICY IMPLICATIONS: Supposedly, there is a vast army of potential workers sitting around who have skills, who can pass drug and background checks and who want to work. If you believe that, I am selling even more shares in my next Broadway show. The idea that the “animal spirits” will cause job growth to soar would make sense if there weren’t a shortage of workers already. Unless companies are making up the story that their biggest problem is finding qualified workers, we are not likely to see the hoped-for 200,000 or more job gains per month. Firms are already laying few people off so they may have to find ways to keep people from retiring or quitting. That can only be done by making it worth the workers’ while to stay on. In other words, by paying up. To the extent bonuses are used and that doesn’t show up in average hourly wages, we may be looking at bad wage data. So, watch the quarterly Employment Cost Index, which next comes out on January 31st. That does a little better job at getting at total compensation. This is important because it is clear from the latest Fed minutes that there is a schism at the Fed over how much to raise rates this year. Accelerating labor compensation costs would worry even the doves at the Fed. So, don’t assume the less than expected headline job growth number will be a moderating factor in Fed rate hike thinking.