Payrolls disappointed in December, falling 85,000, dashing hopes that the month would show the first jobs gain since December 2007. Oddly enough, today's report does show a (very small) positive jobs number, but in November, as a result of an upward revision (from a drop of 11,000 to an increase of 4,000). Job losses continued in construction and manufacturing, although the manufacturing losses are decelerating. The private service sector added jobs for the second month in a row. But firms are still being very cautious, because the biggest improvement in hiring is still in temporary workers. The unemployment rate was steady at 10.0%, with the participation rate falling as some discouraged workers stopped looking for jobs.

We have to remember that the jobs report is a survey, and as such is subject to random variation. It now seems that November's report was a bit too good to be true, and we saw a payback in December. That does not alter the fact that the trend job decline has fallen sharply. We lost an average 199,000 jobs per month in the third quarter; we lost only 69,000 jobs per month in the fourth. It is probable that we will see actual job gains, on average, during the first quarter.

In the details, manufacturing jobs fell by 27,000 in December, the smallest decline since December 2007. Most manufacturing segments showed declines, but a few showed small increases. The manufacturing workweek was steady at 40.4 hours (it had jumped sharply in November, though). Overall manufacturing hours worked fell 0.4%, reversing most of November's 0.5% increase. Productivity gains are still the key driver of manufacturing output. But the payroll count is probably giving too gloomy a signal of the manufacturing labor market. It is likely that some of the increase in temporary help employment (which is classified in the service sector) reflects workers being deployed in manufacturing.

Construction payrolls fell by 53,000, much worse than the 27,000 drop in November, and more in line with previous months. The losses were roughly evenly split between residential (down 19,000), nonresidential (down 17,000), and heavy and civil engineering (down 18,000).

In the private services sector, 17,000 jobs were added, the second monthly increase in a row. The same two major segments drove the gains—professional and business services added 50,000, while education and health services added 35,000. The gains in the professional and business category were all in employment services (56,000), of which temporary help contributed 47,000. Most other service areas continued to shed jobs, with the exception of finance, which added 4,000 jobs.

Firms have now added an average 49,000 temporary workers per month over the last three months. A spurt in temporary hiring is usually the precursor to permanent hiring. The last time we saw a similar surge in temporary workers was in the three months to July 2003, when temp hiring rose an average 41,000 per month. Total payrolls turned positive on a sustained basis two months later, in September 2003.

The government lost 21,000 jobs in December, both in the federal government (down 9,000) and in state and local governments (down 12,000). On the federal side, the cutbacks were entirely accounted for by the U.S. Postal Service.

The unemployment rate was steady at 10.0%. The household survey showed a 589,000 drop in employment, much worse than the payroll survey, but an even bigger 661,000 decline in the labor force. It is much better to focus on the payroll employment count than the household count, since the household survey is smaller than the payroll survey, so its employment numbers are more volatile from month to month. But we must note that the household survey showed another drop in the participation rate (the share of the adult population either in work or looking for work), from 64.9% to 64.6%, hitting its lowest level for this cycle. That suggests that potential workers do not yet perceive a turn in the jobs market, so some have stopped looking. During 2010, as the labor market improves, we should expect the participation rate to rise, which will likely keep the unemployment rate stuck at around 10.0%, even as jobs are added.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—rose from 17.2% to 17.3%. The number of long-term unemployed continued to rise, increasing the mean duration of unemployment from 28.6 weeks to 29.1 weeks. The long-term unemployed will be the last to benefit from the turn in the labor market.

The overall workweek was steady at 32.2 hours, after rising in November. Total hours worked were flat, after November's 0.6% increase. For the quarter overall, hours worked fell at a 0.5% annualized rate, down more slowly than the 2.5% annualized drop in the third quarter. Average hourly earnings growth was steady at 0.2%, but with hours flat, wage and salary income will grow more slowly in December than in November.

The labor market is bottoming out—in terms of job losses—and we expect to see payroll gains turn positive during the first quarter. Overall, we expect to see around 800,000 jobs added over the course of 2010, a modest but not jobless recovery. But the unemployment rate is likely to be stuck around 10%.