United States

Strong job gains likely to continue after smaller december increase


Solid job gains along with newly-emerging wage gains will probably define the U.S. economic narrative this year. Highly-skilled workers across the economy will command a wage premium and the modest tightening in labor markets will help boost real wages for semi-skilled and recent entrants into the workforce. While those encouraging developments will frame economic policy debates at the Federal Reserve and in Washington this year, the December 2014 estimate of job creation will probably show a temporary slowdown in employment gains, which is typical after strong early seasonal hiring.

The December estimate of payroll growth by the Bureau of Labor Statistics may be a challenging report for investors to interpret. Should hiring slow near our forecast of 175,000 new jobs in December, compared with the six-month average of 258,000, we would view this as a seasonally-inspired deviation from the trend rather than an indication of a reversal in direction.

Source: McGladrey, BLS

During the past 20 years, payroll growth has decelerated in December relative to the prior month 12 times, 13 times relative to the three-month average. Of the 13 times payroll gains exceeded the three-month average in the month of November, as it did this year (321,00 versus 239,000), new hiring slowed noticeably in December in 11 of those years. 

Churn in the labor market, as illustrated by a quit rate that is up 11 percent from a year ago and which exceeded 2.5 million during the past two reporting periods, shows renewed confidence among workers in finding new employment, which will eventually create the right conditions to attract workers back into the labor force. This is supported by the continued improvement in the Conference Board’s estimate of the labor differential -- jobs plentiful minus job hard to get -- which dropped to minus 10.6 in December from minus 18 six months ago. This also supports our forecast for a decline in the U.S. unemployment rate to 5.7 percent, and continued improvement in our preferred labor market metric, the U6-U3 spread.

It wouldn’t be surprising for hiring to slow significantly relative to the strong November showing as it did in 2013. After that, the underlying six-month trend of growth near 258,000 jobs per month should reassert itself.

Investors should expect to see a significant slowdown in retail hiring, temporary jobs, trade transport, business services and leisure and hospitality. November hiring in those categories accounted for 262,000 of the 371,000 new jobs created, 70 percent of the total change in employment.

Something to watch during the next year will be the unemployment rate of workers with a college education or at least some college. Those rates are currently at 3.2 per5cent and 4.9 percent, respectively, down from the post-recession highs of 5 percent and 8.9 percent. As the labor market continues to generate momentum, firms will face increasing competition for workers among that group, which should push wages higher.

While, total hours worked will likely remain anchored near the 34.5 average and average weekly earnings and average hourly earnings should remain anchored near their long term averages of 2 percent in December that will not be the case next year.


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