United States

Labor market momentum continues

High-wage job gains outpace low-wage hiring


The economy generated 252,000 jobs in December, just under the six-month trend of 263,000, reflecting improvement in growth conditions in the latter half of last year. The net increase of 50,000 new jobs during the previous two months reinforces our belief that 2015 will be the year of the middle market and “the real economy.”

There is clearly momentum building in the labor market, and given the economic tailwinds from falling oil and gasoline prices, hiring in the final month of last year set the stage for what is shaping up to be a robust year of growth and hiring. More important, this is occurring in an environment of low long-term interest rates and disinflation that will provide relief to a much beleaguered middle class.

We would urge caution in the interpretation of the household report and the monthly decline in average hourly earnings. The December deviation away from recent improving trend in wage growth and people entering the workforce is transitory and both trends will reassert themselves later this year. The narrowing of the labor force will be followed by modest wage inflation across the economy and noticeable wage demands in the technology and manufacturing sectors where there is a general shortage of skilled workers. Our decomposition of private hiring indicates that there were about 134,000 high-wage jobs created in December versus 106,000 low-wage jobs. That excludes the 12,000 government jobs created, which are traditionally higher-paying middle class employment positions.

Source: McGladrey, BLS

Also worth noting, the employment-to-population ratio of the key 25-34 year old demographic increased to 76.4 percent, up from 75.4 percent one year ago. This cohort comprises the foundation of household formation, which is critical to residential investment.

The 273,000 decline in the labor force, which was responsible for the fall in the unemployment rate to 5.6 percent, is not within the range of statistical significance and the minus 0.2 percent contraction in average hourly earnings and the slowing in average earnings on a year- ago basis to 1.7 percent aren’t indicative of a potential turn for the worse. The 2.3 percent increase in wages and salaries through the end of the third quarter of last year matches up with the anecdotal information we’ve received from our middle market clients during the past several months and better reflects the broader economic trends seen in other domestic economic reports. Our preferred labor market metric, the U6 less U3 unemployment rate, held steady at 5.6 percent. The labor force participation rate declined to 62.7 percent.

Source: McGladrey, BLS

Hiring strength continues to show up in the goods-producing sector, which increased to 61,000 from 51,000 in November, and in construction, which saw a gain of 48,000 from 20,000. Trade and transport added 23,000 jobs, the financial sector added 10,000 jobs, firms added 15,000 temporary workers and the education and health sector added 48,000 new employees. The leisure and hospitality area of the economy grew by 36,000 workers.

The bottom line is the December jobs report confirms that the positive trend in hiring doesn't warrant a continuation of current Fed policy much longer. This supports our estimation that the long-awaited rate increase by the central bank will probably begin in June of this year.

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