December registered another solid gain in jobs of 252,000, with growth across the board. The unemployment rate declined to 5.6 percent in part due to lower participation. Average hourly wages continue to lag.
Broad-Based Job Gains A Plus for the Economy
In another solid gain, nonfarm payrolls rose by 252,000 in December. Over the past year, job growth averaged 246,000 jobs per month (top graph). This marks the strongest annual increase in jobs since 1999, although the pace has picked up notably in the final months of the year, averaging 289,000 jobs per month in the fourth quarter. Job gains were recorded in a broad set of sectors including professional & business services, education & health services, leisure & hospitality and even the mining sector. The unemployment rate declined to 5.6 percent, reflecting the combination of better hiring and a drop in participation.
Average Hourly Earnings: Not the Whole Picture
Following the substantial pickup in hiring this year, attention has shifted to wage growth. In December, average hourly wages continued to struggle, falling 0.2 percent and November’s 0.4 percent increase was cut in half. Wages were cut across all industries, with the exception of leisure & hospitality (flat) and other services (up 0.1 percent). Although the mining industry continued to add jobs last month, efforts to rein in costs were evident in the 1.0 percent drop in average hourly earnings. On a year-ago basis, average hourly wage growth has slowed to just 1.7 percent, the weakest rate in more than two years. However, as we have discussed before, average hourly earnings are only part of the picture for consumer spending. With 3 million jobs added over the past year, the income proxy, which factors in the aggregate earnings of workers, continues to signal a decent pace of wages & salaries income growth. While an increase in average hourly earnings of course adds to consumers’ spending power, average hourly earnings tends to be a lagging indicator of changes in real consumer spending (as well as labor market tightness). As illustrated in the bottom graph, the average hourly earnings series clearly lags the wages & salaries series at critical turning points of the economic cycle. Moreover, the wages & salaries series is far more correlated to consumer spending than average hourly earnings.
Aggregate Hours Worked: Continued Gains for Growth
The average workweek was unchanged in December, but, after last month’s gain and solid job growth, the aggregate hours index rose a solid 3.5 percent over the past three months. Broad-based gains in jobs and average weekly hours in the private sector indicate continued improvement in overall economic growth (bottom graph). This supports our outlook for continued strengthening in the economy. Our expectation is for economic growth for the next four quarters at a pace near potential growth of 2.75 percent and, thereby, we also see a further decline in the unemployment rate.