December Payrolls Lower than Trend, 2017 Another Year of more than 2 Million Jobs Added

By Ben Sirois, Economist, Dodge Data & Analytics

December Overview

BEDFORD, MA - January 5, 2018 - Nonfarm payrolls fell short of consensus predictions last month with retail and trade & transport hiring posting declines. A seasonally adjusted 148,000 jobs were added in December, well below the 190,000 predicted in a Bloomberg poll of economists. Job gains for October were revised downward by 33,000 and November payrolls were adjusted up by 24,000, subtracting a net of 9,000 jobs in revisions to the past two months. With December’s data, the 2017 monthly average sits at 171,000, a bit lower than the 2016 average of 187,000 job gains per month. The unemployment rate remained unchanged at 4.1% as did labor force participation coming in again at 62.7%, following a significant 0.4-point decrease in October.

The private sector added 146,000 jobs in December, led by increases in construction (+30,000), leisure and hospitality (+29,000), education & health services (+28,000) and manufacturing (+25,000). Retailers and the trade, transport & utility sectors saw job losses of 20,300 and 10,000 respectively. This may foreshadow upward revisions as the loss in retailer employment doesn’t seem to fit with a very strong holiday shopping season. The strong month for construction payrolls was led by specialty trade contractors (+23,800) and residential builders (+8,200). Nonresidential builders and heavy & civil engineering construction saw small declines of 1,300 and 700 respectively. The public sector added 2,000 jobs in December with local and federal governments posting gains of 5,000 and 1,000 respectively, while state government employment fell by 4,000.

Headline wage growth continued trend, increasing 2.5% year on year in December, after a November 2.4% gain that was revised downward. Wage growth and labor force participation continue to disappoint in otherwise strong monthly labor market reports. After falling dramatically throughout 2017, the underemployment, or U-6, rate rose to 8.1% from 8.0%. Revisions to data lowered the unemployment rate for June 2017 to 4.3% from 4.4%; other months’ rates were unrevised.

2017 Labor Market Recap

Even with the slowing in hiring last month, employers added more than 2 million jobs in 2017 for the seventh year in a row, averaging 171,000 per month. The pace of hiring has cooled in recent years and 2017 was the worst for payroll gains since 2010. While the unemployment rate fell from 4.7% to 4.1% from December 2016 to December 2017, labor force participation ended where it started at 62.7%. The underemployment rate saw significant improvement, decreasing from 9.2% to 8.1% over the past year, reaching pre-recession levels. Year-on-year average hourly earnings hovered around 2.5% throughout 2017, remaining mediocre in an otherwise strong labor market.

The private sector added 2.01 million jobs in 2017, led by increases in professional and business services (+527,000), education and health services (+438,000) and leisure & hospitality (+306,000). These three categories alone accounted for 63% of job gains in 2017.  Construction and manufacturing payrolls also saw strong growth, adding 210,000 and 196,000 respectively. The retail sector was the only major category showing declines the past year with December 2017 showing 67,000 fewer jobs than the year earlier. All major construction categories showed strong hiring, led by heavy and civil engineering (+40,000), followed by specialty trade contractors (+36,700), residential builders (+27,200) and nonresidential builders (+20,000). The seasonally adjusted unemployment rate in the construction industry fell significantly from 6.7% in December 2016 to 5.3% in December 2017, as low as any point since 2000.

All economic indicators other than wage growth and labor force participation suggest an increasingly tight labor market. The 4-week moving average of initial claims sits at 241,700, lower than any time since the 1970 while the market is 50% larger. A reading under 300,000 suggests a strong labor market. The quits rate remains elevated at 2.1%, the highest since April 2008, after bottoming out at 1.3% in the depths of the recession. As hiring prospects improve employees are more likely to willingly leave their current position. According to the Jobs Openings and Labor Turnover Survey, the number of unemployed persons per job opening is at an all-time low of 1.1 and total job openings listed are at an all-time high of over 6 million.

Explanations for continued low wage growth in an otherwise healthy market range from continued slack due to a sizeable number of discouraged workers who may or may not re-enter the workforce, to the advent of the “gig-economy” causing disruptions in traditional labor markets, to globalization making American workers compete more directly with foreign counterparts instead of just domestically. Another potential explanation is that internet based recruiting allows workers to apply nationwide with ease and for employers to cast an extremely wide net in their hiring. This results in a better fit for the job and more efficient labor market, putting less upward pressure on wages.

Labor force participation remains stubbornly low, however when looking at just prime age workers (25-54 years old) it has recovered steadily from 80.6% in September 2015 to 81.9% December 2017. Even more encouraging is the worker to population ratio for prime age workers, which fell to 74.8% at its lowest and has recovered to 79.0%, slightly lower than pre-recession levels. With 10,000 Baby-Boomers hitting retirement age each month and the rising number of young adults in undergraduate and graduate degree programs, the prime age numbers are likely a better reflection of current market dynamics than overall population data.

The labor market in a word is healthy. While wage growth and overall participation suggest there is still some slack in the market other indicators suggest we have reached full employment. Job growth is expected to continue through 2018, albeit at a slightly lower rate than the 171,000 per month set in 2017. This will continue to put downward pressure on the unemployment rate as most economists suggest that only 100,000 jobs per month are needed to absorb increases in the labor force. Industries already facing a labor shortage are likely to see even tighter conditions in the year ahead as a persistent skills gap remains between what employers need and what the long term unemployed can offer. Wage growth and inflation are expected to increase gradually through 2018, keeping the Fed on track for several interest rate hikes this year. 2018 is likely to be the tightest labor market in decades as this economic cycle continues its march on toward its peak.

 

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