With Federal Reserve policy makers having already moved forward with their first interest-rate increase in almost a decade, Friday’s U.S. jobs report takes on elevated importance for a different reason.
In the face of crumbling financial markets centered around a slowdown in China, plunging commodity prices and the global effects of a stronger dollar, the December employment data will help signal the sturdiness of the economy. Payroll gains at or near 200,000 would probably provide some reassurance about growth prospects, even though the government’s survey period was weeks before the recent turmoil. Conversely, a lackluster report will almost certainly add to the wall of worry that’s washed over financial markets this week.
“The overall mood here is risk-off, everybody’s scared,” said Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York.
Here’s what to watch for when the Labor Department issues the employment figures on Friday at 8:30 a.m. in Washington:
The median forecast in a Bloomberg survey calls for a 200,000 increase after the creation of 211,000 jobs in November. Including the projected December gain, and barring big revisions to prior months, employers would have added around 2.5 million jobs last year after 3.1 million in 2014. That would make the last two years the best for the labor market since 1998-99.
Minutes of the Fed’s December meeting, when policy makers boosted their target rate for federal funds, showed participants acknowledged the improvement in labor market conditions. Many judged it as “substantial.”
“Members agreed that a range of recent labor market indicators, including ongoing job gains and declining unemployment, showed further improvement and confirmed that underutilization of labor resources had diminished appreciably since early this year,” according to the minutes, released on Wednesday. At the same time, Fed officials said there was room for slack to be absorbed and signaled further hikes in interest rates would occur gradually.
Meantime, the jobs report will probably show the differing industry responses to the plunge in oil prices and tepid overseas economies. Hiring was probably resilient at service providers, which include restaurants, business services and health-care providers who are less exposed to such headwinds. For manufacturers and energy companies, the job market probably remained poor.
The Bloomberg survey median projects joblessness held at 5 percent, where it’s been since October and the lowest since April 2008. Economists’ forecasts from Barclays Plc, Deutsche Bank Securities, JPMorgan Chase & Co. and UBS Securities LLC project a December jobless rate of 4.9 percent, which Fed officials consider consistent with full employment, or the level below which inflation pressures start to build.
Payrolls north of the 125,000 to 150,000 threshold would probably keep pushing down the unemployment rate, so analysts will instead focus on household income implications, the breadth of job gains and any emerging evidence of wage pressures in the latest jobs report, according to Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence.
“These will directly impact how consumers can propel the next stage of the economic cycle,” Riccadonna said. “With the next interest-rate hike likely several jobs reports away, the December employment data will be digested in the context of the medium-term outlook.”
Wages promise to generate more than the usual amount of excitement in a payrolls report that’s otherwise expected to be pretty much on trend.
Average hourly earnings have been stuck in the 2 percent range, but this time may look different. Wages are projected to climb 2.8 percent in the 12 months ended in December, which would be the most since at least early 2010.
Why say “at least” 2010? Well, the Bureau of Labor Statistics found a processing error in the data from March 2006 through February 2009 and will issue corrected figures on Feb. 5. Until then, we won’t know just how good these numbers are.
But wait, there’s more. Even without the issue of the data miscue, Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said don’t get carried away.
The outsized advance is primarily due to an easy comparison with December 2014, when earnings fell 0.2 percent from the previous month. So, a trend-like 0.2 percent gain last month would result in a surge in the year-over-year reading. This so-called base effect will probably result in some payback with the January employment report when earnings come up against a strong January 2015 comparison.
“This technical distortion-based strength in AHE is unlikely to have staying power, though we do expect the year-over-year pace of AHE to pick up the pace over the course of 2016 as the U.S. labor market moves closer to full employment,” Bullard said in a note to clients.
In short, worker pay is slowly edging up, though job-market watchers may have to wait awhile for an enduring acceleration. Fed Chair Janet Yellen noted at her Dec. 16 press conference that there’s “some incipient signs of faster wage growth.”
With job growth proceeding nicely, policy makers are now focusing on inflation to help set the pace of future rate increases. According to minutes of the Fed’s December meeting, they’re also counting on wage growth to help nudge prices toward their goal.
Economists will also assess indicators such as part-time workers who would prefer to have full-time jobs, and the participation rate, which shows the share of working-age people who are employed or looking for work. Yellen has said she watches these and other measures of slack, or the extent to which the pool of labor is being underutilized.
The underemployment rate, which includes those employed part-time for economic reasons and people who want a job but have given up looking, edged up to 9.9 percent in November from a seven-year low of 9.8 percent the prior month. The participation rate, at 62.5 percent, is hovering close to the lowest level in more than three decades.
Finally, the Bureau of Labor Statistics will issue revisions on Friday for data from the survey of households that will affect things such as the unemployment rate dating back to 2011. Payroll figures from the survey of employers will be revised when the January data is released Feb. 5.