Labor market descends in December
Covid-19 surge and delay in stimulus led to first decline in jobs in eight months.
Bottom Line Nonfarm payrolls in December declined for the first time in eight months, falling by a much weaker-than-expected 140,000 jobs (versus consensus expectations for a gain of 50,000), compared with an upwardly revised gain of 336,000 jobs in November (originally reported as an increase of 245,000). October also was revised up by 44,000 jobs to a strong final gain of 654,000.
What went wrong last month? In our view, Congressional intransigence is at the top of the list, as lawmakers’ inability to pass a timely $2 trillion fiscal stimulus package in July came back to haunt the leisure & hospitality industry, which lost nearly a half million jobs and suffered a 16.7% unemployment rate in December. We believe Congress’ $900 billion Phase 4 package passed in December was simply too little, too late.
In addition, the accelerating surge in coronavirus infections and the sluggish early pace of Covid vaccinations contributed to December’s dismal results, as some cities and states tightened social-distancing rules, shutting down bars and indoor dining at restaurants.
Wages rise for the wrong reasons Hourly wages surged by 5.1% year-over-year (y/y) in December versus 4.4% in November, but these earnings rose for the wrong reasons. The unemployment rate for individuals with less than a high-school diploma soared to 9.8% in December from 9.2% in November, while the unemployment rate for those with a bachelor’s degree or higher actually declined to 3.8% in December from 4.2% in November. As lower-wage workers lost their jobs and higher-wage workers found new employment, the average wage increased.
Claims and ADP weak Our own more conservative nonfarm payroll forecast here at Federated Hermes was for a well-below consensus loss of 111,000 jobs in December, largely due to recent misses in jobless claims and the ADP private payroll survey, which are both important inputs in our employment model.
To be sure, initial weekly jobless claims (an important leading indicator for the labor market) have fallen by 89% from a peak of 6.867 million on March 28 to 787,000 on Jan. 2. But initial claims had backed up by 25% to 892,000 during the 5-week period leading into the survey week of Dec. 12, which negatively impacted this morning’s report on nonfarm payrolls. In contrast, continuing claims (a better measure of the recovering health of the labor market) have fallen by 79% from their peak at 24.9 million on May 9 to less than 5.1 million on Dec. 26.
The ADP private payroll survey posted a much weaker-than-expected loss of 123,000 jobs in December, compared with an expected gain of 75,000 workers and November’s increase of 304,000 jobs.
Private and government payrolls also weak in December Private payrolls also were much weaker than expected in December, losing 95,000 jobs (compared with consensus expectations for a gain of 25,000) versus a positive revision of 73,000 jobs in November to a gain of 417,000. October was revised up by 48,000 jobs to a powerful final gain of 925,000.
The difference between December’s nonfarm and private payrolls was a decline for the fourth consecutive month of 45,000 government jobs (versus a loss of 81,000 in November), due to state and local job losses of 19,000 and 32,000, respectively.
So why are stocks moving higher? President-elect Joe Biden characterized Congress’ $900 billion fiscal stimulus passed last month as a “down payment.” December’s disappointing jobs picture leads investors to only one conclusion: with legislative control of both the House of Representatives and the Senate, Biden now has the tools necessary to add more fiscal stimulus and infrastructure spending to boost the economy and re-energize the labor market.
Merry Christmas? We’re still expecting a solid Christmas retail sales season, up by perhaps 4-5% y/y, driven by a powerful surge in e-commerce from October through January. Retail hiring rose by 121,000 jobs in December (versus a loss of 21,000 jobs in November), and transportation and warehousing added 47,000 jobs in December, down from a gain of 128,000 workers in November.
Internals mixed Manufacturing hiring was stronger than expected in December, adding 38,000 jobs (more than double the 15,000 job gains expected), versus an upwardly revised gain of 35,000 jobs in November (preliminary gain of 27,000). The ISM manufacturing index hit a surprisingly strong 60.7 in December, which is more than a 2-year high, and auto sales have surged by 90% over the past eight months.
The household survey rose by 21,000 jobs in December, down from an upwardly revised gain of 140,000 jobs in November (preliminary loss of 74,000 jobs). The civilian labor force expanded by 31,000 jobs in December, up from a loss of 182,000 jobs in November (upwardly revised from a preliminary loss of 400,000 workers). The number of unemployed workers rose by 8,000 in December, compared with a decline of 321,000 people in November.
As a result, the unemployment rate (U-3) held steady at 6.7% in December, sharply below its peak in April at 14.7% (the single worst month for the labor market since record-keeping began in 1939). Similarly, the labor impairment rate (U-6, also known as the underemployment rate) is a better and broader barometer of the labor market because it includes both part-time and discouraged workers. It declined to 11.7% in December, down from 12% in November and a record high of 22.8% in April. Finally, the labor force participation rate held steady at 61.5% in December, well above its trough of 60.2% in April, a 47-year low.