Payrolls were up 292,000 in December and the unemployment rate held steady at a low rate of 5% in another in a series of increasingly solid reports on conditions in the US labor market. Upward revisions for the prior two months added 50,000 jobs, leading to an average of 284,000 jobs per month in the last quarter of 2015. In another welcome show of strength, the labor force expanded in December, leading the participation rate to tick up slightly.
December’s data reveals that US employers added a net 2.7 million jobs in 2015 while the unemployment rate fell from 5.6% last December to 5% last month. While the level of payroll gains did not surpass 2014’s addition of 3.1 million, it was otherwise the strongest year of job growth since 1999.
Simply put, for all the turmoil out there in the rest of the world, the US labor market tightened up significantly in 2015. Based on some important indicators I discuss below, we are not yet at full employment. But we’re headed there at a solid clip, and that pace accelerated in recent months.
This last point is observed in my patented monthly jobs smoother, showing average monthly job gains over periods of 3, 6, and 12 months. Over the past 6-12 months, payroll grew by about 220K-230K per month; over the past three months, as noted, that pace quickened to 284K per month.
The industry story was largely positive in December, as 64% of private industries added jobs, though part of this could be a function of the unusually warm weather. For example, construction employment was strong, which may reflect unseasonable warmth, although the sector has been adding jobs in recent months.
The retail sales results for December may pose an interesting challenge, though more research is needed. Retail trade employment was essentially unchanged last month, up only 4,300. But transportation and warehousing added over 20,000 jobs in each of the last two months. Could these data be emblematic of the ongoing shift in holiday buying from “brick and mortar” stores to the internet? It will take a lot more digging to see if that’s the case, but I wouldn’t be surprised if this shift turns out to be real.
Manufacturing employment, however, remains a dark spot, due in part to the strong dollar, as discussed below. Factories added only 8,000 jobs in December, and only 30,000 for the whole of 2015, compared with 215,000 in 2014.
As noted, the job market tightened considerably in 2015, but a variety of critical indicators suggest we’re not yet at full employment:
–The underemployment rate, called U-6 in this report, was unchanged at 9.9% last month. While the Federal Reserve has focused more on the official rate, which, at 5% is about at the level they consider consistent with full employment, I calculate that the full employment rate for U-6 is closer to 8.5%. U-6 continues to be elevated due to 6 million part-timers who would rather be full time workers. This measure of slack fell by 760,000 in 2015, but it is still too high.
–Labor force participation: As noted, this rate ticked up a tenth to 62.6%, but it remains somewhat depressed. While some of the drop in participation is due to retirement from the aging workforce, my estimate is that full employment still has the potential to pull in enough potential workers from the sidelines to push the rate up by around 1.5 percentage points.
–Wage growth: It is finally picking up, and thus finally reflecting a tighter job market with some competition among employers for workers. Hourly pay grew 2.5%, before inflation, last year, compared to 1.8% in 2014. But it is essential for policy makers not to conflate any acceleration in wage growth with inflationary acceleration in wage growth. In fact, inflation, even leaving oil out of the picture, has been low and steady. Wage competition is a good thing, representing a more favorable alignment of labor supply and demand than workers have enjoyed in years. Let it proceed!
To what extent is the recent stock market turmoil, here and in China, in these jobs data? Only about 5% of our exports go to China, so, unlike countries like Brazil and some African nations that export extensive commodities to China, we’re not likely to feel a slowing China through export channels.
Imports, however, are another story. Around 20% of our goods’ imports are from China and we already run large trade imbalances with them of around 1.5% of GDP, more then $300 billion/year. As the yuan depreciates in value relative to the dollar, this could exacerbate that gap and amplify the unfavorable manufacturing results cited above.
This trade channel has gotten less attention than the finance channel in recent days, as our own stock market has sold off partly in reaction to China’s market woes. Global capital flows have, of course, been portentous in recent years, and no one should underestimate their potential impact, as once they go south, we too often find out that our financial markets are a lot more inter-connected than we thought. But so far, we see the impact of the strong dollar in the jobs and growth numbers more than we see financial turmoil spilling over from securities’ markets.
In sum, 2015 was a good year for job growth. By the end of the year, the tightening job market finally started showing signs of generating some wage pressures. But we’ve got a ways to go before the economy’s growth is broadly shared. For that, we need to get to and stay at full employment. We’re not there yet, but were getting closer every month. It is thus essential to accommodate these developments, especially though complementary monetary policy. Unless inflation starts to behave in a much more threatening manner–a probability I believe to be low–when it comes to the job-market expansion, love it and leave it alone!