December Employment Report

KEY DATA:  Payrolls: +145,000; Private: +139,000; Revisions: -14,000; Retail: +41,000; Manufacturing: -12,000; Unemployment Rate: 3.5% (Unchanged); Wages: +0.1%

IN A NUTSHELL:  “Despite the ebbs and flows of the job data, the message remains that the labor market is strong.”

WHAT IT MEANS:  After the robust increase in new jobs in November, it was expected that the December report would be disappointing and that it was.  Hiring faded sharply, though the average for the last three months of 188,000 is still quite solid.  Actually, given the lack of workers, that was about as good as could be expected.  Still, there were questions raised by the data.  The over-the-year percentage increase in jobs continues to fade and was the second lowest in over eight year.  Just to get to the total payroll increase it took a huge rise in retail hiring. Three-quarters of that increase was in clothing stores.  Really?  Gains in professional and business services were a lot softer than they had been.  And as expected, manufacturers cut workers.  With Boeing shutting the 737 Max assembly lines, that weakness is likely to continue as suppliers react.  Wage gains continue to decelerate and that is not good news for workers.  Over the year, the average hourly wage was up only 2.9%, the lowest increase since July 2018.

The good news was that the unemployment rate remained at fifty-year lows.  But that was largely the only good news.  The labor force rose moderately and the gain over the year was decent but nothing spectacular.  The participation rate was flat over the month and up only modestly from December 2018.

MARKETS AND FED POLICY IMPLICATIONS:Just as the November report was misleading on the upside, the December report was misleading on the downside.  Put the two together, though, and you have a better picture of the state of the labor market: It is solid but the lack of supply is constraining hiring.  And that raises an interesting point.  Normally, strong growth drives strong hiring.  But with the labor shortage, it the softer growth we have seen may be the consequence of lowered payroll gains.  For businesses to continue expanding they will need more workers and they are just not being pulled into the economy at a pace to offset the loss of baby-boomers from the market.  About the only good thing for businesses in this report was the further slowing in wage increases.  That seems counterintuitive in that the labor shortages should be forcing firms to pay up for employees.  Instead, businesses are attracting workers with non-pecuniary compensation.  How long that can continue is unclear in that once you provide those benefits, it becomes harder to add to them.  The risk the economy faces is that firms are faced with the inability to meet growing demand because of the lack of workers.  They have only so many options, then.  They can reject contracts and grow more slowly or start a bidding war for workers so they can fulfill those contracts.  Neither would be very good for the economy.  So let’s hope for slow growth and be glad the wackos who told us we would get 3% growth for as far as the eye could see were dead wrong.