U.S. December Employment Report: Comments from Christophe Barraud

Christophe Barraud, Chief Economist & Strategist at Market Securities, sent me his analysis concerning the U.S. December employment report:

 

1/ NFP surprised on the upside at 252K (11th consecutive months over 200K) vs 240Ke and once again, figures were revised upward in Nov. (+32K) and Oct. (+18K) so that, in 2014, NFP monthly average reached 246K (highest since 1999), up from 194K in 2013. Note that for private employment, 2014 was the best year since 1997. The improvement was broad based with all components adding jobs. Construction sector created most of jobs (+48K) in a context where weather conditions were clearly better after a cold and snowy Nov. which means that housing data should improve in Dec.

 

2/ Separately, the unemployment rate fell 0.2% to 5.6% which is the lowest since June 2008 but also the threshold defined by the CBO as the NAIRU (full employment). This drop can be explained by the significant decrease of the unemployed people (-383K to 8.688M, the lowest since June 2008) and the ongoing decline of the participation rate to the lowest level since 1978 (-0.2% to 62.7%). Once again, figures suggest that, in line with recent findings in academia, this move is mainly due to demographics and not to discouraged workers. The fact is that many of the people exiting the labor force were actually employed in November which means that older workers decided it was time to retire. Here is the breakdown, last month, some 4.4 million Americans went from having a job to being out of the labor force, the highest number since August 2007. That’s twice the 2.2 million who went from being jobless to out of the workforce.

 

3/ Therefore, more entry-level positions (not getting too much paid) and retirements of more expensive employees probably played a role in the decline of wages (-0.2% MoM, the biggest drop since records began in 2006). Separately, we have to keep in mind that stores and online merchants hired a larger-than-usual army of seasonal workers with low salary. Note that in Dec, retail workers saw average earnings fall 0.4% to $17.04 an hour from $17.11 in November. Finally, several economists were particularly cautious about the data. As a matter of fact, Citi and JPM said they believe the distribution of average earnings declines across sectors suggests a broad adjustment error which may well be corrected next month causing a big snap back higher in the data. This scenario seems likely given that several states raised the minimum wage in January.

 

4 / Finally, note that qualitative indicators were also quite strong as:
*underemployment rate fell 0.2% to 11.2% (lowest since Sept. 2008)
*employed part time for economic reasons declined 61K to 6790K (lowest since Oct. 2008)
*long term unemployed decreased by 77K to 2693K (lowest since Dec. 2008)

 

5/ All in all, it was another very strong report but it raised doubts about the current wages’ growth. My guess is that the decline is transitory and we should see a pickup in Jan. The fact is that the labor force is falling while job openings are increasing.  It offers little room for Fed before raising rates. A liftoff in April (in line with Dec. FOMC dots) is less likely given that inflation will remain particularly low in Q1 so that more than ever, June is our base case scenario.