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Get Four
|  | JANUARY 6, 2006
By Michael Englund Sorting Out December's Jobs ReportIt looks surprisingly weak, but when other data, especially revisions, are figured in, the economy appears to be holding its course of solid growthAt first glance, the U.S. employment report for December, released on Jan. 6, appeared to show a sputtering labor market. Nonfarm payrolls increased 108,000 on the month, sharply below economists' median forecast of a 200,000 rise. But the below-forecast December figure followed a huge upward revision to November, in which job growth was revised to 305,000 from 215,000. The soft headline payroll figure for December was a shocker, but prior payroll revisions combined with a boost to the November workweek left hours-worked through the quarter actually a tad stronger than expected. Wages rose sharply, but prior figures were knocked down to leave a slightly more modest level of wages in December than assumed. The data support a solid and steady growth outlook, despite individual offsetting surprises. PAYROLL LULL. Monthly payroll growth now sits at what appears to be a notably stable two-year moving average of 175,000, which is where this number has sat since mid-2005. The recent sideways pattern masks what was likely a gradual upward trend that was disrupted when Hurricane Katrina struck in late August. We at Action Economics do expect the modest up-slope in the moving average to resume in 2006, as 330,000 Katrina-displaced workers return to the workforce and allow monthly payroll gains in excess of 200,000 in the early months of the new year. The December data left an average payroll gain of 168,000 in 2005 that we believe would have been 27,000 higher, at 195,000, had it not been for the hurricanes. This "ex-hurricane" average would have been slightly above the 183,000 average in 2004. The actual average in 2006 will likely reach 200,000 as displaced workers return. Recent oscillations in payroll growth did leave a modestly lower path for these figures through the fourth quarter than expected, and hence a bigger hurricane-induced payroll lull. It's clear that payrolls slowed in line with gross domestic product growth in the fourth quarter, given our forecast of a 2.7% annual rate for GDP growth in the quarter. Indeed, the payroll growth slowdown was arguably more than proportional, given the greater volatility normally seen in GDP figures than in growth rates for payrolls. QUARTERLY WIGGLES. But the boost in the average workweek to 33.8 hours in November, despite the expected 33.7 figure for December, actually left an uptick in the quarterly growth figures for the workweek relative to GDP. The workweek figures have oscillated in the 33.7 to 33.8 range consistently since the cyclical drop in the 2001 recession, with an uncharacteristic lack of any significant growth trend in the figures through this expansion. But quarterly wiggles do provide swings in production that either offset or exacerbate the swings in payrolls. With the fourth-quarter data, including revisions, the swing is now largely offsetting. The result is that the hours-worked index in the fourth quarter actually showed surprisingly little hurricane impact, and hence a notable narrowing in the gap between GDP growth and hours-worked growth that may suggest upside possibility to the fourth-quarter GDP growth estimate at the expense of the first-quarter 2006 growth outlook. The other major revision story was with average hourly earnings, which posted a solid 0.3% December gain, but with a downward revision in the November gain to 0.1%, and a reduction in the level of wages that actually left the figures a bit below our estimates. Wage growth on a year-over-year basis is clearly trending higher since the start of 2004 from the cyclical low point, with an uptrend that has taken shape as the unemployment rate passed downward through 5.5%. ON SCHEDULE. As is clear in comparing this cycle to past ones, this pattern is remarkably normal despite market commentary about the unusual behavior of the labor market. The December wage data are consistent with this pattern, as was the further drop in the unemployment rate back to the 4.9% rate seen prior to Katrina. The implied path for the post-hurricane industrial production rebound is also right on schedule, with a likely repeat of the hefty 0.7% surge in November now on track for December. We expect a 4% quarterly growth rate for industrial production in the fourth quarter, and we are poised for an even bigger 6% to 7% growth clip in the first quarter of this year. This will follow lean gains of 1.6% in the second quarter and 1.1% in the third that were heavily affected by the combined inventory-correction and hurricane events. Industrial production, as gauged by the capacity utilization figures, is also posting a rapid and expected bounce following the big hurricane impact seen in August and September. INCOME RECOVERS. The personal income figures for December should reveal a relatively small 0.4% gain, following the 0.3% increase of October, which appears lean on the surface. But the workweek and hours-worked revisions for November imply that the prior figure will be revised higher, and we expect a boost to the fourth-quarter income data to materialize in later reports as bonus data are incorporated with a lag. As with last year, bonus payments this year are proving to be large, and probably explain part of the surprising strength in sales through yearend. Meanwhile, the bounce in the savings rate from the August low shows the degree to which the income data have recovered from the big hurricane hit in August and September, but with a resumption of the prior downtrend that is extending into the new year. We continue to expect the savings rate to stabilize finally in 2006 at the recent low level. In total, the headline figures for payrolls looked weak in December. But the mix of revisions left all the major themes underlying the current economic outlook intact. The numbers had no impact on our GDP or inflation projections, and the report appears to provide little clue whether new Fed Chairman Ben Bernanke will take the central bank's reins with a pause in policy tightenings already in the cards, or with the need for one or two additional rate hikes. We continue to expect a pause after a quarter-point increase in the fed funds target rate to 4.5% at the Fed's next rate-setting meeting at the end of January. But it will likely be the inflation and retail sales figures for December, and not the employment report, that will provide the signal to the Fed on the preferred policy path as the new chairman enters the fray.  Englund is chief economist for Action Economics Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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