January 05, 2024
The economy created 216,000 jobs in December, exceeding most projections. The unemployment rate remained at 3.7 percent, the 23rd consecutive month of below 4.0 percent unemployment, the longest stretch in over half a century.
The strong December job gains were partially offset by downward revisions of 71,000 to the figures reported for the prior two months. This brings the average for the last three months to 165,000, a pace close to what should be sustainable.
It is also worth noting that job gains were widely spread across sectors in December. There were some concerns that, after adjusting for the return of striking workers, the November job gains were entirely in health care, government, and restaurants. By contrast, in December, most sectors reported job gains.
Index of Aggregate Hours Fall, Implying Another Strong Quarter of Productivity Growth
The second and third quarters showed remarkably fast productivity growth, with annual rates of 3.6 percent and 5.2 percent, respectively. While no one expects these sorts of numbers to be sustained, it is plausible that with recent developments in AI and other technologies, we could be on a faster productivity growth path.
In spite of the strong job growth in December, the index of aggregate hours actually fell 0.2 percent. For the quarter as a whole, the index grew at just a 0.8 percent annual rate. With GDP likely to show growth around 2.5 percent, it looks like we will see another quarter of solid productivity growth. This will not be close to the extraordinary pace of the second or third quarters, but we might have seen some decline after two very fast quarters. Steady growth adds some weight to a faster growth path view.
Wage Growth Remains Strong
The average hourly wage jumped by 15 cents in December, bringing the annual rate over the last three months to 4.3 percent. This is likely somewhat faster than would be consistent with the Fed’s inflation target, although the data are erratic. (The pace through November had been just 3.4 percent.)
It is also worth noting that if we are on a faster productivity growth path, the economy can sustain more rapid wage growth without inflation. In addition, if we are to see some reversal in the pandemic rise in profit shares, then wage growth has to be somewhat more rapid than its sustainable non-inflationary pace for at least some period of time.
There also continues to be evidence that the wage growth we are seeing is reducing wage inequality. The average hourly wage for production and nonsupervisory workers in the low-paying leisure and hospitality sector rose at a 7.8 percent annual rate in the last three months and by 4.6 percent over the last year.
State and Local Government Employment Passes Pre-Pandemic Level
Growth in state and local government employment had lagged behind private sector employment through the recovery. This was partly due to the fact that governments have to go through a more bureaucratic process to raise wages to remain competitive in a tight labor market. They have finally gotten back above their February 2020 employment levels. State governments added 8,000 jobs in December, putting them 9,000 jobs (0.2 percent) above their pre-pandemic level. Local governments added 37,000 jobs, putting their employment level 13,000 (0.1 percent) above the February 2020 level.
Manufacturing and Construction Sectors Both Add Jobs
Manufacturing and construction have always been the most cyclical major sectors in the economy. For this reason, if we are going to see a recession, we likely would be seeing them losing jobs. The December data are encouraging in this respect, construction had added 17,000 jobs, while manufacturing had modest growth with 6,000 new jobs. This followed a month in which all the job growth could be attributed to returning UAW strikers.
Retail added 17,400 jobs, supporting the view that the job loss reported for November was largely a seasonal adjustment issue with stores changing their holiday hiring patterns. Healthcare added 37,700 jobs, down from an average of 66,500 jobs over the prior six months.
The motion picture industry added 11,400 jobs, as it is getting back up to speed after the end of the Screen Actors Guild strike. Restaurants added 22,100 jobs, roughly in line with its average growth over the last year. Nursing homes added 4,700 jobs, while childcare centers added 4,500. Employment in both is still below pre-pandemic levels.
The temporary help sector lost 33,000 jobs in December. It has been losing jobs all year. In the past, employment in the sector was seen as a leading indicator of employment trends more generally. That doesn’t seem to be the case now.
Household Data Show Sharp Drop in Employment
One big surprise in this report is a drop of 683,000 in the number of people reported as employed. This is almost certainly due to measurement error, as it is inconsistent not only with the establishment survey but also data on unemployment insurance filings and private sector reports on job growth. The fall in reported employment led to a drop of 0.3 percentage points in both the employment-to-population ratios and labor force participation rates.
Unemployment Rates Fall for Both Blacks and Asian Americans
The unemployment rate for Blacks fell by 0.6 pp to 5.2 percent. This is historically low, but still above the 4.8 percent all-time low hit in April. The unemployment rate for Asian Americans fell 0.4 pp to 3.1 percent. This puts it slightly below the 3.5 percent rate for whites. Typically, the unemployment rate for Asian Americans has been slightly below the rate for whites.
Unemployment Due to Quits Edges Higher
The share of unemployment due to voluntary quits edged up from 13.2 percent to 13.4 percent. This share is typical for a strong labor market but below the peaks of more than 15.0 percent seen in much of 2022.
Another Very Solid Jobs Report
There is not much to complain about in the December report. The 216,000 job growth figure for the month is likely faster than can be sustained, but the three-month average is pretty much right on target for solid job growth. The pace of wage growth implied by the December data may be a bit concerning, but given the erratic nature of the data, probably not a major worry.
The drop in employment reported in the household survey is almost certainly an aberration, as it is inconsistent with just about all the other data we have on the economy for the month. It is also inconsistent with the survey’s own data on the willingness of workers to quit their jobs before they have another one lined up.
And the drop in aggregate hours implies that we will have another solid quarter for productivity growth, adding to the evidence that we may be on a faster productivity growth path. This would be really great news.
