American exceptionalism is the primary takeaway from one of the more remarkable years in labor market dynamics over the past half century as the economy generated 256,000 new jobs in December.
The American economy remains at full employment and will remain tight for the near future,
That increase stands well above the 100,000 to 150,000 level that is necessary to keep employment conditions stable.
The unemployment rate declined to 4.1% (4.086% when taken out to three decimal points), while average hourly earnings increased by 0.3% on the month and by 3.9% on the year.
Approximately 89.3% of men in their prime working years of 25 to 54 were employed in December and 77.7% of women in that cohort were also working.
Robust job gains amid solid wage growth will temper calls for further rate cuts by the Federal Reserve and will most likely add fuel to the fire that is causing the global sell-off in government bonds.
This sell-off is causing long-term yields to rise across the developed economies and will surely result in a stronger dollar against the major trading currencies.
We think that the top-line increase in employment overstates the underlying trend in jobs growth, which is closer to 150,000 per month.
This report was most likely subject to challenges in seasonality issues, which are highlighted by the 49,000 increase in trade and transport hiring and the 43,000 advance in retail hiring.
Both of those categories were well above trend and are not sustainable, and we would anticipate modest downward revisions over the next two months
Still, the American economy remains at full employment and will remain tight for the near future.
The prospect of workers being removed from the labor force through the immigration channel will pose an upward risk around wages, and that wage pressure should temper inclinations of some policymakers to cut rates further.
A remarkable year
Over the past year, the economy generated 186,000 jobs per month on average and the unemployment rate averaged 4%. During the entire year, wages increased by an average of 0.3% per month and by 4% overall.
However one slices and dices it, this past year represented one of the best in memory for American workers as wages increased above the rate of inflation during the entire year as the unemployment rate hovered around 4%—the definition of full employment.
Policy Implications
Sustained job gains, strong economic growth and stubborn inflation have dampened the appetite of the Federal Reserve for further rate cuts.
There is simply little inside the December U.S. employment report that would cause the Fed to deviate from its current rate path.
Recent rhetoric from central bank policymakers suggests that any rate cuts will be pushed back until the second half of the year given current labor market dynamics and coming policy changes that may add to pricing pressures across the economy.
The paradox of full employment
Employment gains in December were driven by an increase of 231,000 jobs in the service sector with 33,000 jobs added by the federal and state governments.
Private education and health care added 80,000 positions, leisure and hospitality 43,000, professional business services 28,000, information 10,000 and the financial sector 13,000.
Construction added 8,000 jobs to close out the year in contrast with a decline of 8,000 positions in the goods-producing sector and a 13,000 drop in manufacturing.
Read RSM’s global economic outlook in the latest issue of The Real Economy.
Full employment presents an interesting paradox. The median duration of unemployment stands at 10.4 weeks, which implies that if one loses a job, it will take three months to find a new one.
But 22.7% of those unemployed have been without work for 27 weeks or longer, which suggests that at full employment we simply do not have a full understanding of contemporary labor market dynamics, especially as employers look to deploy labor-saving technologies like artificial intelligence.
Total private hours worked remained unchanged at 34.3 while aggregate hours worked increased by 0.2%, which bodes well for domestic spending.
The labor force participation rate remained unchanged at 62.5% and the employment-to-population ratio increased to 60%.
The labor force increased by 243,000 workers as individuals streamed into the workforce to capture those rising wages. This gain is why the unemployment rate declined to 4.086%.
The takeaway
The great American jobs machine churns on.
While it is appropriate to obsess over potential turning points and hints of paradigmatic change in the domestic labor market, those concerns often lead economists and analysts to miss the forest for the trees.
Hiring remains strong, wage growth clearly supports household consumption in the vicinity of 3% to 3.5% and the economy expanded at or above 3% over the final six months of last year.
The better takeaway is that American exceptionalism remains the most accurate description of the U.S. economy as it begins a new year.
