Weekly Economic Commentary

The December Employment Report

  • 01.13.20
  • Economy & Policy
  • Commentary

Job growth slowed last year, partly reflecting a tighter job market. However, wage growth, while higher in 2019, has remained moderate, much lower than one would expect given the low unemployment rate.

Private-sector payrolls averaged a 162,000 monthly gain in 2019, down from 215,000 in 2018. However, next month’s benchmark revisions to the establishment survey data (payrolls, hours, earnings) will reduce the March 2019 level of payrolls by about 500,000 (or -0.3%), which will push 2018 job growth lower. Slower global growth and trade policy uncertainty likely had an impact on job growth in 2019, but tighter job market conditions was likely a bigger factor.

The unemployment rate held steady at 3.5% last month. Benchmark revisions to the household survey data were minor. For the key age cohort, those aged 25-54, the unemployment rate remained at 3.0%, but the employment/population ratio hit 80.4%, the highest since the 2001 recession. The ratios for teenagers and young adults (20-24) remain below pre-recession levels. The rate for older workers has gradually trended higher.

Despite the tight job market, average hourly earnings rose modestly in December, moderating the year-over-year gain: +2.9% overall, and +3.0% for production workers. That’s a lot lower than one would expect in comparison to previous periods of low unemployment. The decline in union membership and a greater concentration of large firms explains part of that, but it does suggest that, with little danger of higher inflation, the Fed should remain accommodative as labor is reallocated to its highest and best use in the years ahead.

Data Recap – Iran’s missile attack on U.S. targets in Iraq had a short-lived impact on the financial markets as tensions quickly de-escalated. Nonfarm payrolls rose a little less than anticipated. Wage growth moderated despite low unemployment.

In its Global Outlook, the World Bank wrote that it expects global growth to pick up slightly in 2020, but “downside risks predominate, including the possibility of a re-escalation of global trade tensions, sharp downturns in major economies, and financial disruptions in emerging market and developing economies.”

The December Employment Report was close to expectations. Nonfarm payrolls rose by 145,000, with a net downward revision of 14,000 to October and November. Private-sector payrolls rose by 139,000, leaving the three-month average at 182,000 – a 162,000 average in 2019 (vs. 215,000 in 2018, although the 2018 figure will be revised lower in next month’s benchmark revision). The unemployment rate held steady at  3.5% (benchmark revisions to the household survey data were minor). For those aged 25-54, the unemployment rate remained at 3.0%, while the employment/population ratio hit 80.4%, the highest since the 2001 recession. Average hourly earnings rose just 0.1% (+2.9% y/y).

The ISM Non-Manufacturing Index rose to 55.0 in December, vs. 53.9 in November and 54.7 in October, consistent with moderate growth in the overall economy. Growth in business activity rebounded, but new orders moderated. Employment growth was moderate. Input price pressures were moderate. Comments from supply managers were mixed, with respondents positive about the potential resolution in trade tensions, but continued difficulties in finding skilled workers.

Unit Motor Vehicle Sales fell to a 16.7 million seasonally adjusted annual rate in December, vs. 17.1 million in November and 17.4 million a year ago. The underlying trend in vehicle sales has been flat to slightly lower in recent years (driven largely by replacement needs).

The ADP Estimate of private-sector payrolls rose by 202,000 in the initial estimate for December. Figures for October and November were revised higher (leaving the three-month average at 159,000).

The U.S. Trade Deficit narrowed to $43.1 billion in November, vs. $46.9 billion in October and $51.1 billion in September. Merchandise exports rose 0.7% (-1.4% y/y), while imports fell 1.4% (-5.7% y/y). About half of the decline in imports since August have been in consumer goods, likely reflecting stockpiling ahead of expected tariffs. Imports have a negative sign in the GDP calculation, so net exports are expected to add to 4Q19 GDP growth (although declining imports are not a sign of strength).

Factory Orders fell 0.7% in November (-1.5% y/y), reflecting a 72.9% plunge in defense aircraft orders (don’t read too much into that). Ex- transportation, durable goods orders edged down 0.1% (-0.4% y/y). Orders for nondefense goods ex-aircraft rose 0.2% (+0.4% y/y), with shipments down 0.3% (+0.2% y/y), trending about flat relative to 3Q19. (M20-2901693)

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