Headline nonfarm payrolls rose by 156,000 in December, versus an anticipated 175,000. Meanwhile, November’s data point was revised upward to 204,000. The unemployment rate rose to 4.7%, while the participation rate was higher at 62.7%. There was a small rise of 18,000 in the group classified as “not in the labour-force,” following an increase of 406,000 in November. The U6 unemployment rate (an expanded measure of unemployment that takes into account marginally attached and part-time workers) was down to 9.2% in December. The household survey showed an increase of 63,000 jobs in the month, following an increase of 146,000 in November. Meanwhile, the adjusted household survey (the BLS’s attempt to make it more comparable to the payroll survey) pointed to a decrease of 529,000 after a rise of 431,000 in November.
Private nonfarm average hourly earnings were 0.4% higher in December (0.3% for production and nonsupervisory workers), following a fall of 0.1% in November (hence some payback here). Annually, they are now 2.9% higher (but only 2.5% for production and nonsupervisory workers). This is starting to suggest some slightly stronger upward pressure on wages. Private average weekly hours for production and nonsupervisory workers were unchanged for the fourth straight month; they are 0.6% lower on a year ago. The 156,000 change in December’s payrolls was largely due to education and health services (70,000), leisure and hospitality (24,000), manufacturing (17,000), and professional and business services (15,000). There was a decline in payrolls for the construction sector (3,000), while retail jobs only grew by 6,000. Meanwhile, the mean duration of unemployment was again lower at 26.0.
With the unemployment rate at 4.7%, which is essentially the level the Fed and most economists would estimate the natural rate of unemployment to be (the point below which inflation starts to accelerate), the key questions for 2017 thus become, how much lower can it realistically go, and at what point do we really start to see wage inflation starting to accelerate? Back in 2000 it fell as low as 3.8% and only then did inflation really start to rise. Hence, there is precedent for much further strength. At present, small businesses are now reporting the biggest shortage of qualified labour since 1996 (when the series began). Furthermore, if there are limits imposed on immigration, coupled with greater fiscal stimulus, this would likely exacerbate labour shortages further. Wage gains to-date have been fairly muted. Why? In large part due to retiring baby boomers being replaced by younger/cheaper workers, a lack of inflation, hence, little need to push for higher wages, memories of the last financial crisis, and importantly also by changes in technology displacing workers. Furthermore, there is still a potentially large pool of workers who are no longer in the labour-force, but could possibly return if demand increases by enough, as testified by the still very low employment-to-population ratio and participation rate. Hence, much of this weakness is structural. Nevertheless, as demand continues to increase through 2017, pressure is likely to push upward and this therefore continues to be a key data point for the Fed and the financial markets.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.