Orlando's Outlook: December jobs report a lump of coal

01-05-2018

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Bottom line The Department of Labor this morning posted much weaker-than-expected job gains in December—with a downward revision for October and November—that was completely inconsistent with recent strength in the ADP report, initial weekly jobless claims and the Challenger job-cut announcement. While we think today’s number could be revised higher, the equity market is rallying on this surprising weakness, which investors believe could chill the Fed at Chairman-designate Jerome Powell’s first policy-setting meeting on March 20-21.

Weaker-than-expected nonfarm payroll gains At only 148,000, the number of jobs added in December came in well below the Bloomberg consensus of 190,000 jobs and our own more optimistic 230,000 estimated increase here at Federated. In addition, the Bureau of Labor Statistics (BLS) revised October and November lower by a combined 9,000 jobs.


That disappointing miss is in sharp contrast to a powerful increase of 250,000 private payroll jobs (consensus at 190,000) in yesterday’s ADP report for December, with small- and mid-sized company hires accounting for a bullish 78% of the total. In addition, initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Dec. 16 rose by 245,000, not far from Oct. 14’s 44-year low of only 223,000, which points to continued strength in domestic employment. Finally, the global outplacement consultancy Challenger, Gray & Christmas reported yesterday that U.S.-based employers announced roughly 32,000 job cuts in December, bringing the year-end total to about 419,000 layoffs, the lowest annual total since 1990.

What went wrong? Construction and manufacturing added a better-than-expected 30,000 and 25,000 jobs, respectively, in December. But retail inexplicably lost 20,000 jobs in the month, compared with a healthy, upwardly revised gain of 26,000 jobs in November. This happened despite what we believe were the best Christmas retail sales in six years. Sure, we expect that online sales outpaced brick & mortar, but that should have translated into robust job gains in other categories, such as transportation (think FedEx and UPS). So there could be a measurement problem here that likely will be adjusted in coming months.

Unemployment and participation rates unchanged, labor-impairment rate rises The official unemployment rate (U-3) was unchanged for the third consecutive month at 4.1% in December, a 17-year low. Similarly, the labor-force participation rate (the share of working-age people in the labor force) was unchanged in December for the third consecutive month at 62.7%, down from a 3-year high of 63.1% in September 2017, but languishing close to its 38-year cycle low of 62.4% in October 2014. Finally, 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—ticked up to 8.1% in December due to a rise in people working part-time for economic reasons.

Hours worked flat, but wages rise The average private workweek for all employees was unchanged at 34.5 hours worked in December. But hourly wages rose for the third consecutive month by 0.3% on a month-over-month basis in December and by 2.5% on a year-to-year basis. We expect this trend toward higher wages to accelerate over the course of 2018 due to the tightness of the labor market, particularly among highly skilled individuals.

Beware of the ‘bomb cyclone’ While we expect that today’s disappointing jobs report will be subsequently revised higher, we also are entering a perilous weather period, in which major snowstorms and brutal cold—such as we’re currently experiencing with the so-called “bombogenesis”—may distort payrolls in January and February as people are unable to get to work. Consequently, the Fed may put off a rate hike in March, which should keep the equity market’s powerful rally on track into mid-year.

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