Orlando's Outlook: December jobs report ends 2016 on sour note

01-06-2017

Bottom line Nonfarm and private payrolls were weaker than expected in December, reflecting poor corresponding ADP and survey-week claims data, both important leading indicators. Moreover, the unemployment rate (U-3) ticked up to 4.7%, and average weekly hours worked slipped a tick to a two-year low at 34.3.

But this morning’s report was not a disaster, as there were several positive elements. First, November’s disappointing nonfarm payrolls were revised sharply higher by 26,000 jobs to 204,000, which redeems our well-above consensus estimate last month of 218,000, based upon November’s stronger-than-expected ADP report and the lowest initial weekly unemployment claims in 43 years during the all-important survey week. In addition, manufacturing turned positive for the first time in five months in December, wage growth leapt by the strongest pace since June 2009, the labor force participation rate ticked higher and the labor-impairment rate (U-6) declined.

While the Federal Reserve (Fed) hiked interest rates by a quarter point at its recent December policy-setting meeting, the question now is what do they do for an encore, and when? Does the Fed focus its attention on the 22% decline in nonfarm payrolls from the third quarter’s monthly average of 212,000 jobs to the fourth quarter’s average of only 165,000 jobs? Or does it focus on the 2.9% year-over-year (y/y) increase in wages last year, the fastest such pace in more than seven years? Regardless, we don’t expect any policy changes from the Fed before their mid-March meeting, which provides policymakers with the luxury of studying two more labor reports in the interim.

ADP soft in December The ADP National Employment Report, a forward-looking proxy for private payroll growth, rose by a less-than-expected 153,000 jobs in December (versus the Bloomberg consensus forecast of 175,000), compared with November’s stronger reading of 215,000 hires. In December, small firms with fewer than 50 employees added 18,000 jobs (12% of total, compared with November’s upwardly revised 40,000, or 19%); midsized companies with between 50 and 500 employees added 71,000 (46% of total, compared with November’s upwardly revised 91,000, or 42%); and larger companies with more than 500 employees hired 63,000 (41% of total, compared with November’s downwardly revised 84,000, or 39%).

Jobless claims plunge at year-end Initial weekly jobless claims, a leading economic and employment indicator, saw only 235,000 people filing for unemployment insurance for the week ended Dec. 31 (with a four-week moving average of 256,750), likely due to seasonal quirks surrounding the holidays. That’s just off the 43-year cycle low of 233,000 for the week ended Nov. 12, 2016.  More relevant for today’s disappointing labor report, however, was the crucial survey week that ended Dec. 17, which posted an elevated 275,000 initial claims. 

Disappointing December nonfarm payrolls They grew a weaker-than-expected 156,000, below both the Bloomberg consensus of 175,000 and our own more conservative 170,000 forecast here at Federated. The Bureau of Labor Statistics (BLS) revised up October and November by a combined 19,000 jobs. October’s preliminarily weaker-than-expected gain of 161,000 jobs, which was revised down last month to a gain of 142,000, was revised down again to a final gain of 135,000. November’s preliminarily weaker-than-expected gain of 178,000 jobs was revised up this morning to a stronger gain of 204,000. But the job-creation trend is clearly slowing, down 22% from a monthly average of 212,000 in the third quarter to only 165,000 in the fourth quarter.

Private payrolls also soft Businesses only added 144,000 jobs in December, below the Bloomberg consensus of 170,000. But the BLS revised October and November sharply higher by 53,000 jobs. October’s preliminary gain of 142,000 jobs, which was revised down to a gain of 135,000 jobs last month, was revised back up to a final gain of 146,000. November’s preliminary gain of only 156,000 jobs was revised sharply higher to a gain of 198,000 jobs.

Government hiring positive Increases at the federal and local level offset cutbacks among states, lifting overall government payrolls by 12,000 for the month. That compares with a downwardly revised gain of 6,000 in November (preliminarily at 22,000), a loss of 11,000 jobs in October (preliminarily a gain of 19,000 jobs) and gains of 3,000 in September, 44,000 in August, 31,000 in July, 33,000 in June and 25,000 in May. In December, the feds added 5,000 jobs, local government hiring rose by 11,000 jobs, and state hiring declined by 4,000 jobs.

Pace of household gains slips This admittedly volatile household survey rose by 63,000 jobs in December, compared with a downwardly revised gain of 146,000 jobs in November and a loss of 24,000 jobs in October, which represented the first decline in six months. The Labor Department released revisions for the household survey this morning dating back to 2012. The survey is a leading indicator for nonfarm and private payrolls, so the downward trend in December perhaps foreshadowed the disappointing nonfarm payrolls. It also serves as the basis for the official U-3 unemployment rate.

Unemployment and participation rates rise; labor-impairment rate declines The civilian labor force rose by 184,000 workers in December, after contracting by 187,000 workers in November. That increase caused the official U-3 unemployment rate, calculated from the household survey, to tick up to 4.7% from its 9-year cycle low of 4.6% in November. The labor-force participation rate similarly ticked up to 62.7% in December. While that’s still below the 2-year high at 63.0% in March 2016, it remains above the 38-year cycle low of 62.4% in October 2014.  The U-6 labor-impairment rate—known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—slipped a tick to 9.2% in December because of the sharp 27% month-over-month (m/m) decrease in discouraged workers, which is a new 9-year cycle low.

Wage growth rises while hours worked remain flat Hourly wages rose m/m by a robust 0.4% in December, compared with a decline of 0.1% in November. That translates into a y/y wage increase of 2.9% in December, the most since June 2009, compared with a 2.5% gain in November. The average private workweek for all employees was a tick lighter than expected for the second consecutive month at 34.3 hours worked in December, which matches a 2-year low. That’s a problem, as each additional 0.1 hour worked is the equivalent of adding an estimated 350,000 jobs or more to the economy.

Manufacturing turns positive, construction slips Our confidence that manufacturing jobs would return, in conjunction with the rebound in the ISM manufacturing index, was manifest this month. Manufacturing turned positive for the first time in five months, adding a much stronger-than-expected 17,000 jobs in December, after losing 7,000 jobs in November, 4,000 in October, 6,000 in September and 16,000 in August. The ISM index rose to 54.7 in December after bouncing off 49.4 in August, which represented economic-contraction territory. Construction lost 3,000 jobs in December after adding jobs for three consecutive months, with gains of 17,000 jobs in November, 14,000 in October and 26,000 in September. With winter upon us and interest rates rising sharply in recent months, we expect housing to take a seasonal pause until spring.

Retail revised higher December added 6,000 new retail jobs, but disappointing preliminary November and October hiring levels were revised sharply higher, as we had expected. Retail added an upwardly revised 20,000 jobs in November (compared with a preliminary loss of 8,000) and October lost 2,000 jobs (versus a preliminary loss of 9,000). In contrast, retail had added 23,000 new jobs in September, 17,000 in August, 13,000 in July and 22,000 in June. We remain cautious on overall Christmas sales, although online sales growth should far outpace sluggish brick & mortar sales.

Temps turn negative Temporary work fell for the first time in four months, shedding 16,000 jobs in December, compared with gains of an upwardly revised 24,000 jobs in November (preliminarily reported as a gain of 14,000), 5,000 new jobs in October and 34,000 in September. Temps are an important leading indicator of employment growth, so December’s turndown is troubling.

Leisure solid This economically sensitive category added 24,000 new jobs in December, and an upwardly revised 37,000 new jobs in November and 20,000 new jobs in October. That compares with more muted hiring levels of 8,000 in September and 10,000 in August. So while the pace of leisure hiring has strengthened, there’s still upside to the level of 53,000 new jobs added last June. 

Education & health care accelerate This category added 70,000 new jobs in December, 43,000 in November, 50,000 in October, 38,000 in September, and 56,000 in August. In good economic times and bad, this category performs consistently best.  

JOLTS joins in the refrain This measure of labor-market dynamics such as resignations, help-wanted ads and the pace of hiring indicated that job openings increased 5.53 million in October (the most recent data available), down slightly from September’s upwardly revised 5.63 million. The hiring, quits and layoff rates remained at 3.5%, 2.1% and 1%, respectively. Hires were essentially unchanged at 5.1 million from October. Strike the chorus: employers are having trouble finding workers with the skill sets they need, so they are inclined to hold onto their employees, and rising wages usually follow closely behind.

Layoffs move to trend line The Challenger Job-Cut Report from the firm Challenger, Gray & Christmas said its measure of layoffs numbered 33,627 in December. While that is a 25% m/m increase and a 42% y/y increase, the base periods are very low. Moreover, December’s reading means the fourth-quarter layoffs totaled 91,000, the smallest quarterly total since the second quarter of 2000. This confirms that companies are holding onto their employees amid a tight labor market, which has skill mismatches relative to available positions.

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