Orlando's Outlook: Strong December jobs report doesn't matter for markets


Bottom line The labor market was much stronger than expected in December – with solid upside revisions for both October and November, which should have quelled some of the China-driven angst that has roiled global markets thus far in 2016, with stocks off by 6% in their worst start to a new year ever.  But investors have largely ignored this week’s impressive list of domestic economic beats – from solid auto sales to the widening spread between the ISM’s manufacturing and non-manufacturing indices to a healthy labor market –and have focused exclusively on their fears of a Chinese hard landing and the potential for a global recession. Consequently, we expect more equity-market weakness in the weeks to come.

The Labor Department reported this morning that nonfarm payrolls rose by 292,000 in December (compared with consensus estimates of 200,000 and our own more aggressive forecast for 257,000 here at Federated), with a positive revision of another 50,000 jobs for October and November.  Private payrolls added 275,000 jobs last month (versus consensus at 201,000) with upward revisions totaling 51,000 jobs in the two prior months.  Moreover, the household survey soared by 485,000 jobs (versus 247,000 in November).  On the negative side of the ledger, wage growth and hours worked were flat in December.

Strong nonfarm payrolls beat Nonfarm payrolls grew by a much stronger-than-expected 292,000 in December, which handily exceeded the Bloomberg consensus of 200,000 and even our own, more aggressive forecast here at Federated for a gain of 257,000 jobs.  In addition, the Bureau of Labor Statistics (BLS) revised October and November higher by a combined 50,000 jobs.  The BLS guided October up by another 9,000 jobs, from a preliminary 271,000, to a revised 298,000, to a final reading of 307,000 jobs today. November’s preliminary gain of 211,000 was revised up by 41,000 this morning to 252,000.   So this healthy three-month average of 284,000 jobs was nearly double disappointing summer readings of only 153,000 in August and 145,000 in September.

Private payrolls strong, too Private payrolls also added a stronger-than-expected 275,000 jobs, versus the Bloomberg consensus at 201,000.  The BLS positively revised job gains by a combined 51,000 in October and November.  October’s preliminary gain of 268,000 private jobs, which was revised up last month to a gain of 304,000, was revised again this morning to a stronger final gain of 312,000.  November’s preliminary gain of 197,000 jobs was revised up to a gain of 240,000 jobs this morning.  That three-month average of 276,000 jobs is much improved over September’s final gain of 165,000 and August’s 125,000.  

Government hiring accelerates We added 17,000 federal, state and local government jobs in December, which is the difference between private and nonfarm payroll gains.  That compares with a downwardly revised 12,000 new jobs in November and a loss of 5,000 jobs in October.  In November, the feds gained 4,000 jobs, the states added 6,000 and local government hiring gained 7,000.

Household survey soars The admittedly volatile household survey gained 485,000 jobs in December, versus gains of 247,000 in November and 320,000 in October.  The household survey is a leading indicator for nonfarm and private payrolls, so this strong month-over-month increase in December is very constructive.  The household survey also serves as the basis for the unemployment rate.

Unemployment and labor-impairment rates flat; participation rate rises  The civilian labor force rose by 465,000 workers in December (an increase of 485,000 employed and a decline of 20,000 in the number of unemployed), up sharply from a gain of 273,000 workers in November and 229,000 workers in October. The official unemployment rate (U-3), calculated from the household survey, remained unchanged for the third consecutive month at 5.0% in December, a seven-year low dating back to April 2008. The labor-force participation rate ticked up to 62.6% in December, which is just off a 38-year cycle low of 62.4% in October.  The labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed— was unchanged at 9.9% in December, which is just up from a seven-year low of 9.8% in October.

Wages and hours worked flat last month In one of the biggest disappointments in today’s labor report, wages were unchanged in December, which was two ticks lighter than November’s increase of 0.2% and compared with consensus expectations for a similar gain, on a month-over-month basis.  That translates into a cyclical high 2.5% year-over-year gain in December (the most since July 2009), up slightly from the 2.3% increase in November.  The average private work week for all employees came in at 34.5 hours in December for the second-consecutive month.  While that may seem insignificant, the addition or subtraction of only 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs from the economy.

Construction remains strong; manufacturing perks up The warm December helped to boost construction employment by 45,000 jobs in December, versus 48,000 laborers in November (the largest such gain in nine months) and 35,000 jobs in October.  Manufacturing may have hit bottom, adding 8,000 jobs in December, compared with upward revisions of 2,000 jobs in November and 3,000 jobs in October, after losing 8,000 in September.  

Retailers start to pare hiring Retailers added only 4,000 new employees in December, after strong hiring trends of 32,000 jobs in November and a downwardly revised 25,000 in October, as they prepared for the holiday season.

Temps bounce Temporary help—an important leading indicator of employment growth — rebounded by adding 34,000 jobs in December on the heels of a decline of 12,000 jobs in November and the addition of 35,000 jobs in October.  There was no gain in September.

Transportation soars With the very strong on-line Christmas, transportation companies added 23,000 workers in December and 20,000 in November, after only 2,000 new hires in October.

Leisure slows An economically sensitive category, only 29,000 new jobs were added in December, a sharp falloff from the addition of 47,000 new jobs in November, 48,000 in October, and 52,000 in September.

Education and health rebound Education and health added 59,000 new workers in December, after an upwardly revised 50,000 new workers in November (previously reported as only 40,000 new jobs in November) compared with 73,000 hires in October and 58,000 in September.

Strong ADP supports today’s beat The ADP National Employment Report, a forward-looking proxy for private payroll growth, soundly beat estimates for the second month in a row, with a much stronger-than-expected gain of 257,000 jobs in December  (its largest increase since December 2014), which was well above the Bloomberg consensus estimate of 198,000.  November’s report was revised down to a still robust gain of 211,000 jobs from a preliminary reading of 217,000, and October’s report also was revised downward from a gain of 196,000 jobs to a final gain of 173,000.

ADP said that in December, small firms (with fewer than 50 employees) added 95,000 jobs (37% of the total, versus 81,000/37% of the total in November). Mid-sized companies (between 50 and 500 employees) added 65,000 jobs in December (25%, compared with November’s 62,000/29%). Hiring in larger companies (with more than 500 employees) added 97,000 hires (38%, versus 74,000 /34% in November).

Little to glean from new unemployment claims figures  Initial weekly jobless claims—an important leading economic and employment indicator—essentially met Bloomberg consensus estimates of 275,000 by dipping to 277,000 for the week ended Jan. 2, a decrease of 10,000 from the prior week’s level of 287,000.  The smoother four-week moving average decreased by 1,250 to 275,750.  Both figures are still near 42-year lows of 255,000 reached in July and 256,000 in October.

JOLTS steady The Job Openings and Labor Turnover Survey (JOLTS) for October, which is the most recent data available, slipped to 5.383 million job openings, compared to September’s upwardly revised 5.534 million.  July’s record high stood at 5.668 million.  JOLTS measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends.  On the other side of the equation, the quits rate was unchanged at 1.9% for the seventh consecutive month, suggesting workers still are not overly confident about landing another job if they leave their current one.

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