The December payroll report was disappointing in the payroll survey headline—just 103,000 jobs created—especially after the strong signal from what now looks like a rogue ADP survey. But overall it still pointed to a gradual improvement in the labor market. October and November were revised up, by 70,000 jobs in total, and if we look at the three-month moving average of job creation, that's now up to 128,000, probably a good indication of where we really stand.
Normally, 103,000 jobs wouldn't be enough to drive the unemployment rate down, but the unemployment rate did drop by a steep 0.4 percentage point, to 9.4% from 9.8%. A drop of this size in one month is very unusual (it has not happened since April 1998). The good news is that half the drop in unemployment came from more jobs (the household survey showed more jobs created than the payroll survey). The bad news is that the other half came from a lower labor force—people no longer looking for work.
Private-sector job creation, at 113,000, was up from just 79,000 in November. Government jobs fell by 10,000, more than all of them lost in the local government sector (down 20,000) as budget cutting continued. Federal jobs rose by 10,000 and state jobs were flat.
Manufacturing added 10,000 jobs, its first positive month since July. The gains were all in durable goods, notably fabricated metals, electrical equipment, and transportation equipment. The manufacturing workweek edged down to 40.2 hours (from 40.3 hours), while production worker hours edged up 0.1%, suggesting a moderate gain in manufacturing production during December.
Construction lost 16,000 jobs, mostly in heavy and civil engineering. Residential and nonresidential construction were lower, but only by 2,000 and 1,000, respectively.
The key job gains were in private services, which added a total of 113,000 jobs, up from 79,000 in November. The gains were concentrated in leisure and hospitality (up 47,000) and healthcare (up 36,000).
The leisure and hospitality gains suggest some easing in discretionary budgets for travel and eating out for consumers and businesses. Temporary jobs rose 16,000, more slowly than in recent months. Retail jobs rose 12,000, after a 19,000 decline in November. Overall, retail jobs created during the fourth quarter—before seasonal adjustment—totaled 646,000, up from 501,000 last year, and the best gain since 2007.
The private workweek was steady at 34.3 hours, and with private employment slightly higher, that left total hours-worked in the private sector up 0.1%. Overall, private hours in the fourth quarter rose at a 2.3% annual rate, just slightly below the third-quarter's 2.5% annualized increase.
December average hourly earnings edged up 0.1%, and total private payrolls were up 0.3%, a little extra spending power for those in work, but which was probably more than wiped out by rising gasoline prices.
The steep drop in the unemployment rate, from 9.8% to 9.4%, took it back to its lowest level since May 2009. Household employment rose by 297,000 (much better than the 103,000 payroll increase), while the labor force fell by 260,000, generating a 556,000 decline in unemployment. The labor-force participation rate fell from 64.5% to 64.3%, hitting a new low for this cycle.
Over time, the household and payroll surveys show similar employment changes, but in any one month they can diverge sharply. The jump in household employment this month looks like a "catch-up" for very weak months in October and November (when household employment actually fell). As of December, household employment was up 1.25 million over the previous 12 months, similar to the 1.12-million increase in payroll employment.
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—fell from 17.0% to 16.7%.
The jobs report does not show the labor market taking off, but is consistent with a gradual improvement driven by better economic growth. We expect that GDP growth was 3.7% in the fourth quarter, and that 2011 will show 3.2% growth, up from a 2.9% average in 2010. That should be sufficient to pull job creation above 200,000 by mid-2011, and to bring the unemployment rate down further—eventually.
Although the unemployment rate did fall very sharply this month, the economy will need to create jobs in 2011 not just for the underlying growth in the labor force, but also for those who return to the labor force once they see more jobs available. We suspect that the unemployment rate will get worse again in the near future before it gets better, and look for it to end the year 2011 at around 9.0%.
