Recovery, resilience and reimagination are apt descriptions of the American economy two years into a debilitating pandemic.
The American economy added 199,000 jobs in December, and the unemployment rate declined to 3.9%.
Like a bruised prizefighter in the late rounds of a championship match, the American economy closed the year on a strong note by adding 199,000 jobs in December. Once one accounts for upward revisions to previous months by the Bureau of Labor Statistics, total employment increased by 340,000.
That brings the total number of jobs created last year to roughly 6 million as the unemployment rate declined from 6.5% at the start of the year to 3.9%. That increase in jobs is the largest in any year since the BLS started keeping track following World War II.
Once again, the BLS produced a tale of two surveys in the report it released on Friday. The establishment survey, which is used to estimate the top-line change in jobs, generated the strong yet disappointing increase of 199,000.
The household survey, though, which is used to estimate the unemployment rate, generated a statistically significant increase of 651,000 and indicated that 168,000 people entered the labor market which is why the unemployment rate declined to 3.9%. The labor force participation rate of prime-aged workers 25 to 54 years old stands at 81.9%.
Average hourly earnings increased by 0.6% on the month and were up by 4.7% on a year-ago basis. This is a function of a labor market that has tightened noticeably, and one should anticipate upward wage pressure in the coming months.
Not surprisingly, on a three-month average annualized pace, average weekly earnings increased by a robust 6.1%, which in addition to the increase of 0.2% in aggregate hours worked will provide support for households struggling to pay for necessities.
These gains in wages will tend to reinforce the arguments of the hawks at the Federal Reserve who would prefer to hike rates starting at the March meeting.
The quick recovery
To put the recovery of the labor market in perspective: Following the financial crisis it took eight and a half years for the unemployment rate to decline to 3.9%, while it took less than two years following the shock of the pandemic.
That can almost certainly be attributed to the fiscal policy response, which this time operated as a complement to the Fed’s zero interest rate policy and array of liquidity-enhancing programs during the early portion of the crisis.
But now, the resilience of the U.S. economy will be put to the test. The rapid spread of the omicron variant will almost certainly dampen hiring to the point where a flat or negative reading in the January jobs data may be in the cards. That may happen even though the latest wave of the virus has yet to result in a noticeable increase in first-time claims for unemployment benefits.
Investors, firm manages and policymakers should anticipate one to two months of soft employment readings followed by a period of payback and larger gains in the springtime.
Federal Reserve policy
Despite this uncertainty in the pandemic, the monthly data and benchmark revision will not result in any alteration of the Fed’s monetary policy.
The central bank is poised to accelerate its policy normalization with three 25 basis-point rate hikes this year and a likely roll-off of roughly $100 billion per month in its balance sheet starting in September. That would be more than double the roughly $50 billion pace that the Fed permitted during its 2017-2019 drawdown of the balance sheet.
Despite the economy still being 2.7 million jobs short of February 2020, when the pandemic began, the Fed is leaning toward the price stability portion of its dual mandate to tamp down inflation.
At the same time, it is groping its way toward a definition of full employment that may be somewhat disappointing to those at the Fed who want a far greater decline in the unemployment rate for Blacks (currently 7.1%) and Latinos (4.9%).
Inside the data
Job gains on the month were primarily driven by higher-paying areas of the economy. The goods-producing sector added 54,000 jobs, construction 22,900 and manufacturing 26,000, with the financial sector adding 8,000 and business services 43,000. Trade and transport added 30,000 positions while education and health added 10,000.
For the second straight month the retail trade sector saw a net loss, with 2,000 jobs eliminated in December following a decline of 13,000 in November. That would mark the weakest period of holiday retail hiring in recent memory. Overall government jobs declined by 12,000 in December.