Financial Review

December Jobs Report

…..Nonfarm payrolls gain 156k in December. Unemployment rate up to 4.7%. The Obama administration’s job creation legacy. Wages increased. Why?

Financial Review by Sinclair Noe for 01-06-2017

DOW + 64 = 19,963 (intraday record 19,999.63)
SPX + 7 = 2276
NAS + 33 = 5521 (another record close)
RUT – 4 = 1367
10 Y + .05 = 2.42%
OIL – .11 = 53.66
GOLD – 8.40 = 1172.80

Today is a Jobs Report Friday. The US economy added 156,000 jobs in December; this was below estimates of around 170,000. The unemployment rate edged up to 4.7% from 4.6% as more people entered the labor force in search of work. Employers hired 19,000 more workers than previously reported in October and November. The U.S. has created more than 2 million jobs in each year since 2011, though hiring has slowed over the last two years. Employment growth in 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015. The slowdown in job growth is consistent with a labor market that is near full employment. The latest payrolls tally brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015.


The steady gains in employment have finally started to push worker pay higher. Average hourly wages jumped 0.4% to $26 in December. Hourly pay increased 2.9% from December 2015 to December 2016, marking the fastest 12-month increase since a recovery that began in mid-2009. Hours worked were unchanged at 34.3 last month. December’s job gains were broad, education and health services employment rose 70,000, the biggest increase since February. Leisure and hospitality added 24,000. Manufacturing payrolls gained 17,000 after declining for four straight months. Transportation added 14,700 jobs. Financial activities gained 13,000 jobs. Retail sector employment rose 6,300 after increasing 19,500 in November, although holiday hires were down significantly from 2015 as many retail outlets turned cautious. Government employment increased 12,000 in December. Construction payrolls fell 3,000 in December after three consecutive months of increases.


Among the details of the December report, the participation rate, which shows the share of working-age people in the labor force, increased to 62.7 percent, from 62.6 percent. The participation rate has fallen significantly since its high around the year 2000. The root cause of declining participation remains disputed, with demographics and discouraged workers cited as some of the possible explanations. In 2017, the labor-force participation number will likely remain a major focus. About half of the decline reflects Baby Boomers moving into retirement; the other half reflects prime-age workers, many of whom have just abandoned their hopes for a job.


The U-6 unemployment rate dropped one-tenth of a point to 9.2%; U-6 is a broader measure that includes unemployed, under-employed or people working part-time who would like to be full-time, and discouraged workers who have stopped looking for jobs. The U-3 rate has in the past few months returned to the pre-recession levels that economists consider full employment. The U-6 has seen significant gains in recent months, but remains higher than before the recession. When we hear talk about the economy being near full employment, consider the U-6 rate and realize there is still plenty of slack. The BLS reports 1.7 million people are marginally attached – looking for work; 5.6 million are employed part-time for economic reasons.


Janet Yellen has said the economy only needs to add about 100,000 new jobs per month to maintain current levels of employment and absorb new workers into the labor force. Trump promised to create 25 million new jobs under his administration. The math doesn’t work. To add 25 million jobs, would mean dragging people out of retirement and putting school kids to work, and the unemployment rate would be a negative number. It won’t happen. But there is room for continued job growth in 2017.


This is the last full jobs report of the Obama administration. Since January 2009, the economy has added 11.3 million jobs. This includes a decrease of 354,000 government workers, so private payroll growth has been slightly higher. The Obama administration loves to tout that the economy has added jobs every month for the past 75 months, the longest streak on record and much higher than the previous record of 48 between 1986 and 1990. By comparison, the Clinton administration added 22.9 million total jobs; Reagan added 15.9 million; Johnson added 12 million nonfarm payrolls. So, on jobs, Obama tops Carter, Nixon, Truman, Eisenhower, Kennedy, Bush I and Bush II, and Ford – in that order. Considering that the US lost more than 700,000 jobs in each of the first three months of Obama’s presidency — including 791,000 jobs lost in January 2009 — the comeback for the US labor market has been impressive by most counts. As of December 2016, total nonfarm employment exceeded its pre-recession peak by 6.9 million jobs.


As more Americans find work and the labor market tightens, you can expect wages to rise because of the competition among employers to attract the remaining qualified job candidates. In recent months, wages have again gained ground, up 2.9% in the past 12 months, compared to inflation running around 1.5% – so we have real gains. Before the crash, the U.S. was cruising along with annual wages rising at rates between 3 and 4 percent and those rates are characteristic of other economic boom times over the past 30 or so years. So things are still not quite as good as they were—and a lot of the wage growth that did happen in the first several years of the recovery was in fact eaten up by inflation.


So, if there is slack in the labor force, why are we seeing wages start to pick up?


Part of the answer is basic supply and demand. Part of the answer is demographics and skill sets; many younger workers stayed in school during the downturn and now they are entering the workforce well-trained and demanding decent wages. Part of the answer might be recent legal changes affecting wages.


A few weeks ago, over four million Americans were poised to benefit from new overtime regulations at the start of the new year. The new rule – which would require time-and-a-half pay for those working more than 40 hours a week – was part of an executive order signed by President Obama in 2016. The order would have effectively doubled the salary threshold for mandatory overtime pay from $23,660 to $47,476 – forcing employers to either pay many more workers overtime, or bump their salaries beyond the reach of the threshold. That executive order was overturned in November by a federal judge in Texas, but it is possible that some workers got a raise before that ruling. Those raises might not last; there are already reports that some employers are clawing back those raises. And there is a strong probability the executive order will be rescinded under President-elect Trump. Some employers will choose to follow-through with existing salary hikes: Walmart says it plans to keep the pay raises it instituted for entry-level manager salaries. In September, the retailer bumped pay for the position to $48,500 up from $45,000 to avoid the federal-overtime threshold.


Also, many minimum wage workers are seeing an increase in their paychecks. According to data collected by the National Employment Law Project, a workers-rights advocacy group, 19 states and 21 local jurisdictions raised their minimum wages at the start of 2017. Many of those increases were small cost-of-living adjustments, but some of them were dramatic. Arizona, where voters approved a wage hike on Election Day, raised its minimum wage by nearly $2 an hour, to $10 from $8.05. Maine’s minimum wage jumped to $9 an hour from $7.50. Washington state and Massachusetts both raised their minimums to $11 an hour. In total, six states plus the District of Columbia now have minimum wages of at least $10 an hour. (Oregon will join the club later this year.)


Most of those increases in minimum wage did not show up in the December jobs report, but we should see some impact on the January 2017 report in one month. The big question is whether these aggressive increases in minimum wage will be job killers or poverty preventers.  Most studies have found that wage increases have at most a small impact on total employment – that is, there is little evidence for the claim that the minimum wage is a major job-killer. But over the next few months we will see the minimum wage experiment unfold in real-time.


Part of the explanation for rising wages might also be found in the changing landscape of the labor market. According to a paper published last month through the US National Bureau of Economic Research, routine, low-paying, manual labor jobs are disappearing. Routine occupations employed about 40 per cent of the working-age population in the US in 1979. That figure was stable for about a decade and then declined steadily to reach about 31 per cent in 2014. Many of those routine jobs have been automated or will be. For workers, that means they either accept low paying jobs in other areas, or train for higher-paying jobs, or drop out of the labor market. This might go a long way to explaining the historically low labor force participation rate, and the stubbornly high U-6 unemployment rate, and the sudden resurgence in wages. The challenge for the future will be solving the mismatch between the types of jobs people used to have and the types of jobs the economy is currently creating.


In the immediate aftermath of the jobs report, the yield on the 10-year Treasury note rose. The dollar halted a two-day slide. Gold stayed lower, while emerging-market equities were little changed. Oil edged above $54 a barrel before sinking lower. The report did little to alter trader expectations on the Federal Reserve’s path for interest-rate increases.



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