December Employment Report

KEY DATA: Payrolls: +252,000; Revisions: +50,000; Private Sector: +240,000; Unemployment Rate: 5.6% (down 0.2 percentage point); Hourly Wages: -0.2%

IN A NUTSHELL:   “Firms may be hiring like crazy but they are not paying up for those workers, at least not yet.”

WHAT IT MEANS:  Today I get to be a true economist: There is both good news and bad news in the December employment report.  Let’s start with the positive.  The economic jobs machine has shifted into high gear.  Payrolls rose strongly in December and both the October and November gains were revised upward.  On average, employment increased by an average of nearly 290,000 per month over the past three months.  For all of 2014, almost 3 million new positions were added, the most since 1999, the peak of the Y2K/dot.com boom.  Job gains were across the board, with construction, manufacturing, finance, health care and especially restaurants adding workers solidly.  We are eating out again and that is a great sign.  Also, the public sector has finally started to help out with state and local governments hiring as their revenues continue to rise.  While the federal government, excluding the ever-shrinking postal service, is not hiring very much, at least it is no longer cutting workers.

There was also a very sharp drop in the unemployment rate.  We hit the lowest level since June 2008.  Okay, the labor force declined as did the participation rate, but by now, everyone should know what I think of those numbers.  The labor force growth in 2014 was disappointing but it did pick up quite sharply in the second half of the year.  As for the participation rate, it was down only 0.1 percentage point from December 2013.  It has stabilized recently.

The disappointing aspect of the report was the decline in the hourly wage and a downward revision to the November increase.  While the labor market continues to tighten, firms seem to be able to put off raising wages. 

MARKETS AND FED POLICY IMPLICATIONS:  This was a really good report but the wage numbers keep it from being a great one.  I am just not sure what to make of the hourly earnings data.  For example, there were hourly wage declines in manufacturing, education and health care, finance, information services and utilities.  These are not your typical low pay sectors where you would expect worker pay to fall, especially when demand is rising.  While retail wages were off, they were flat in hospitality and leisure.  Basically, I am not so sure we should make any judgments about worker compensation from these numbers.  That is important since the Fed is watching inflation closely, especially since some members are concerned that inflation is too low.  More rapidly rising wages would ease those concerns.  Still, with the job market firming, it is only a matter of time before we see consistently better wage increases.  The dam holding back the wage gains may be higher and stronger than expected, but it is not unbreachable and with the unemployment rate near full employment, we will likely see the cracks appearing very soon.  Until they do show up, though, Fed Chair Yellen can remain “patient”.