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U.S. Payrolls Strengthen in the Fourth Quarter, Wages Lag

American job creation picked up in December giving the fourth quarter the best employment  totals in a year and making the entire twelve months the second best for U.S. workers in fifteen years.

The 292,000 hires by American industry were far more than the 200,000 median forecast and followed November's upwardly revised 252,000, initially 211,000, according to the Labor Department's Employment Situation Report on Friday.

Together with October's improved 307,000 new positions, the final three months of the year averaged 284,000 the highest since the fourth quarter of 2014. In all of 2015 an average of 221,000 new positons were filled monthly, placing it behind last year's 260,000 but ahead of all other years since 1999 when 265,000 were created each month.

The U-3 unemployment rate remained at 5.0 percent in November for the third month in a row as predicted.  

Average hourly earnings were flat on the month, missing the 0.2 percent estimate and falling from October’s 0.2 percent gain. Annual wages rose slightly to 2.5 percent from 2.3 percent in October, but slipped the 2.7 percent forecast. Average weekly hours were static at 34.5, as predicted. Work hours have been virtually stationary since November 2001, varying just 0.2 from 34.4 to 34.6 excepting a one month dip to 34.3 in December 2013. 

The steady job market performance of the past two years indicates that employers are reasonably upbeat about the economy’s potential, though that optimism may be tempered following the recent rout in stocks.

The dramatic fall in global equities this week, though precipitated by events in China, has no doubt been influenced by the December Federal Reserve rate increase and the prospect of a rising American rate cycle for the first time in a decade.

The Fed’s own projections anticipate four more 0.25 percent hikes this year.  If the U.S. central bank keeps its word (and its nerve) the end of the year Fed Funds rate of 1.5 percent would be the highest in eight years.  

Despite the strong job creation over the past two years, wages have barely kept pace with inflation.

Though the 2.2 percent average gain in 2014 and 2105 has been an improvement on the 2.0 percent average of the prior two years, it is only appreciably better than inflation in 2015 when the 0.1 percent annual CPI was due almost entirely to the collapse in energy prices.  From 2102 through 2014 inflation measured 1.8 percent annually and average hourly earnings climbed just 2.0 percent. 

A likely reason for the poor salary and wage performance lies in the composition of jobs added by the U.S. economy.  The strongest job growth in November was, as it has been of most of the recovery, in the lower paying categories.   Healthcare, temporary help, leisure and hospitality  and retail and other relatively low paying classifications counted for about 135,000 of the 292,000 total, or roughly 45 percent.  The one group of high wage positions, 45,000 construction jobs, was related to the warm weather in much of the country in December and will probably be lost in January.

Factories added 8,000 jobs in November, the most in five months. However, that figure contrasts markedly with reports on the health of the U.S. manufacturing sector, which by other measures, such as ISM employment, seems to be in or near recession. 

The labor force participation rate rose one tick to 62.6 percent but its remains mired at the generational low where it has been for more than four years. 

The U-6 or underemployment rate, which includes part-time workers who prefer full-time employment and those who have looked for work in the past year, as opposed to the better known U-3 rate which only counts as out of work people who have searched for work in the past month and includes all  part-time work,  held at 9.9 percent.

Equites ended their worst ever start to a year on Friday with the Dow losing 167.65 points closing at 16.346.45, down 6.08 percent since Monday’s open. The S&P 500 shed 5.69 percent on the week, ending at 1922.03 having opened on Monday at 2038.20. The Nasdaq lost 5.19 percent finishing at 4643.633.

December’s job numbers and indeed those of the last two year may have reassured the Fed governors that the American economy is strong enough to tolerate a prolonged, if gradual series of rate increases.  But this week's turmoil in the financial markets and the likelyhood of more to come, will test Fed resolve.  It is a long way until the April 29th FOMC meeting. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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