FINANCIAL REVIEW

The December Jobs Report

Sinclair Noe — January 9, 2015

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DOW – 170 = 17,737
SPX – 17 = 2044
NAS – 32 = 4704
10 YR YLD – .05 = 1.97%
OIL – .54 = 48.25
GOLD + 14.50 = 1224.40
SILV + .14 = 16.62

Each month the Bureau of Labor Statistics reports on total non-farm payroll employment. The Jobs Report is usually released on the first Friday of each month. Last Friday was still considered part of the holidays, so we got the report this morning.

In December the economy added 252,000 net new jobs and the unemployment rate dropped to 5.6% from 5.8%. Job gains from November and October were revised higher by 50,000 additional jobs. November now posted 353,000 jobs, and October revised up to 261,000. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing. The economy has now added 200,000 or more jobs each month for the past 11 consecutive months. 2014 was the best year for total employment since 1999, and the best year for private employment since 1997. And for the past 3 months we’ve average 289,000, which is about as good as I can recall. Private-sector employment, which in December clocked in at 118 million, has grown 10.4% from its 2009 low. The nation has gained back all the jobs it lost during the recession, and added some more.

The economy gained just over 2.95 million jobs in 2014, with 2.86 million of those coming from the private sector. After 5 years of public sector job losses, we finally saw 91,000 new government jobs last year; with about 12,000 new government jobs in December. We have now seen 51 consecutive months of job gains, which is a record, and it is a particularly impressive accomplishment considering that the government has cut about 611,000 jobs since 2009. The sluggishness of government jobs to recover is unprecedented.

The labor-force participation rate dropped 0.2 percentage points in December to 62.7%, matching a post-recession low and a level last seen in 1978. The participation rate looks at the percentage of the working age population actually in the labor pool. And this has been low for quite some time; the major reason is because the Baby Boomers are now heading into retirement, so it is a demographic shift. The share of men in their prime, working years who are not working has more than tripled since the 1960s. Also, the downturn left many workers discouraged at job prospects. If some of those discouraged workers start to look for jobs again, it is possible that we could see more job creation without pushing the unemployment rate lower. Instead, in December the size of the labor force actually fell, with 273,000 people no longer either holding a job or looking for one. So, one of the reasons the unemployment rate dropped from 5.8% to 5.6% is because the labor pool was smaller. That may be a statistical aberration, but even over a longer period of time the steep drop in the labor force since 2008 has not reversed itself.

Breaking down the job gains by industry sector: professional and business services gained 52,000 jobs, education and health services added 48,000, also construction added 48,000, leisure and hospitality gained 36,000, manufacturing added 17,000, and financial activities added 10,000.

White-collar businesses, health-care firms, restaurants, hotels and construction companies were the top job creators in 2014. Professional and business jobs increased by 732,000 — a quarter of all jobs created in 2014. Some 30% of the professional jobs went to temporary workers who earn below-average wages. Many of those positions can lead to lucrative full-time offers, but not for now. The health-care industry hired 311,000 people in 2014. While most of these positions are well paid, more than one-third of new health-related jobs involved social workers who get paid less than the average US wage. Restaurants and hotels boosted staffing by 421,000 as Americans traveled more often and increased how much they went out to eat. Employment in the construction trade jumped 290,000 to mark the largest gain since 2005. Manufacturers added 186,000 jobs, the largest advance since 2011.

The U-6 unemployment rate declined from 11.4% in November to 11.2% in December, the lowest rate since September 2008. U-6 measures unemployed people plus people working part-time for economic reasons or because they can’t find decent full-time jobs, and by this measure there are 6.8 million underutilized or unemployed workers. And this indicates there is still slack in the labor market; these are workers who don’t have much leverage for higher wages. Meanwhile, there are more than 2.7 million people who have been out of work for 6 months or more, and nearly a third of those have not been able to find a job for more than two years; this number is trending down but is still considered high.

The number of full-time workers increased by 2.7 million in 2014, while part-time jobs rose by just 72,000. So, we’ve heard stories that companies would only hire part-time workers because of costs associated with health care insurance, but the reality is that companies did not replace full-timers with part-timers.

Wages fell 5 cents, or 0.2%, to $24.57 an hour. And the gain over the past 12 months slowed to just 1.7%. Wage gains have averaged 2% or slightly less since 2010, just two-thirds as fast as they normally grow. Economists predict a tightening labor market will spur higher wages but so far earnings haven’t budged much. The Federal Reserve in December cited a lack of clear evidence of rising wages as reason it may keep interest rates near zero for an extended period. Although wages aren’t rising especially fast, most Americans are taking home more money because they are working longer hours compared to a few years ago. The average length of the workweek was unchanged at 34.6 hours in December to remain at post-recession high.

At the current pace of job growth, the economy should be closing in on a 5% unemployment rate by this time next year, which is consistent with full employment. Wage growth should also pick up more broadly in coming months. Of course, that has been the expectation for quite some time; more jobs would lead to higher wages, but it hasn’t happened yet. The economy clearly has no wage or price pressures that would point towards an early liftoff on interest rates. A reminder that in November wages increased by 0.4%, which was a little higher than normal; but that number was revised lower, to a gain of just 0.2% for November. And the December number was a 0.2% decline – so in the past 2 months wages were completely flat.

Wages have been flat for a long time, decades in fact. But workers may be getting a little break lately; not that their wages have increased – they haven’t, wages are still flat, but you can probably buy more with those wages. The reason is because inflation remains low. One of the big examples is lower gas prices, which is like an extra $1,000 a year for a typical family. As the job market gets tighter, it is expected to push wages higher, and those higher wages would then be passed along in the form of higher prices, which is another way of saying higher inflation. The net effect is that many workers don’t realize an increase in buying power, even when they realize higher wages.

At a certain point, wage and price inflation is expected to increase when the unemployment falls to a specific level, known as the natural rate. The natural rate would be when inflation plus productivity growth matches nominal wage growth. Right now inflation is just under 2% and productivity is around 1.5%, so we wouldn’t be at the natural rate until wage growth hit about 3.5%; right now wage growth is about 1.7%, or about half the natural rate. Some people think the natural rate of unemployment is 5%; in other words, when the unemployment rate hits 5%, the market will tighten and wages will increase to that 3.5% range, but that’s more of a guess than a hard fact. First come jobs and then wages follow, but no one knows how much employment needs to increase before real wages start to increase. Also, keep in mind that inflation and productivity are also moving targets. The point is that whatever the natural rate is, we are not there yet, and that means more jobs can be created and more people can be employed before we have to worry about wage inflation.

It’s also a reminder that there are powerful deflationary or disinflationary forces at work. And with any luck the Federal Reserve should take note of this; there is still significant slack in the labor market. Tighter monetary policy carries the risk of slamming the brakes on economic growth; and that risk of killing economic recovery is greater than the risk of a little inflation in an otherwise deflationary world.

Now, if we could see an uptick in hourly earnings over the next few months, it would translate into significantly better living conditions for most workers, and could lead to a solid spurt of real wage growth. Don’t expect an uptick in wages though. For now, employers can add jobs without having to pay more in wages, which isn’t what most workers are hoping for, but it isn’t really terrible either. It means employers should be able to make a decent profit from the labor of their workers and for the workers a job still beats unemployment.

Yesterday I talked about how the economy has been improving, and that is true, but we still have a lot of work to do. Today’s jobs report confirms that notion. More people are getting jobs, which is much better than losing jobs, but even if you have a job, you are likely struggling to make ends meet. Economic inequality is soaring, social mobility is declining, earnings at most income levels are stagnant or falling, and the percentage of working-age Americans who are actually working is at a record low. We saw economic growth in the last quarter. But robust growth should lead to rising wages, and we didn’t see that.