The Jobs Report: What Weakness?


By Michael Englund We at Action Economics expected that the December jobs report would provide no new signals regarding the economy or Fed policy. And the release of the report on Jan. 7 proved the truth of this assumption -- in spades.

The headline number on nonfarm payrolls rose 157,000 on the month, undershooting economists' median estimate of 175,000. But job-growth figures for the prior two months were revised higher, leaving a slightly stronger set of payroll figures for the three months overall than economists had assumed.

In the report's wake, the markets nevertheless reacted to the figures as "weak," thereby reflecting that stocks were actually priced for an even stronger set of figures than economists had projected. This positioning is a testimonial to how solid the tone has been for recent U.S. data and how willing the market now is to assume a strong trajectory for the economy.

FORECASTS STILL HOLD. Overall, there can be little doubt that the December employment data were remarkably close to economists' predictions, as virtually all of the indicators that market analysts watch were close to expectations. In addition to the expected payrolls data, the annual household revisions left the figures in line with estimates as well.

The unemployment rate remained at an expected 5.4%. The workweek posted the forecast bounce, to 33.8 hours from 33.7. Factory employment growth turned modestly positive, at 3,000. And the year-over-year wage gain of 2.6% was exactly as predicted, even though the seasonally adjusted December change fell one tick short of assumptions at 0.1%.

Ultimately, the "as expected" December jobs report translated to no changes in Action Economics' economic forecasts for either December or the fourth quarter. The personal income report for December remains poised for a huge 2% December surge due to the Microsoft (MSFT) dividend, with a gain that would otherwise have been a solid 0.5%. The industrial production report should reveal a 0.6% December gain, with a rise in the capacity utilization rate to 79.1%.

PRODUCTIVITY GAINS. The fourth-quarter employment cost index (ECI) remains poised for a 0.8% gain that translates to a 3.8% year-over-year increase. The productivity report for the quarter should reveal a 3% growth rate, alongside the 2.1% growth rate revealed for hours worked, to leave a fourth-quarter gross domestic product growth rate that we estimate at 4.3%.

If the report contains any news, it might be that retail employment didn't rise proportionately with strength in sales, as might have been expected. Furthermore, the factory workweek and overtime data continue to fall somewhat short of the strong output figures, implying continued large productivity gains. These observations will be useful for economists but probably provide no new insights for the markets.

Perhaps the greatest result of the December jobs report is that bonds reacted positively. The recent warning from the Fed in the December minutes of the rate-setting Fed Open Market Committee (FOMC) may have contributed to the market being braced for more positive news about the economy. In addition, the falling dollar and sustained low level of long-term yields in the U.S. probably suggest that upside surprises in the U.S. factory, trade, housing, and inflation figures are something the markets should indeed become increasingly concerned about through the first half of the year.

WALKING ON EGGSHELLS. Greater strength in those categories would likely translate to a more aggressive tone in FOMC policy statements. The markets may prove particularly wary about the economic reports scheduled for release in January, given the recent Fed policy warning.

In total, the U.S. economy has posted unambiguous strength in recent months. Combined with evidence that the Fed is becoming more concerned with the inflationary consequences of remarkably low short-term interest rates, that may leave bond traders walking on eggshells as the two-day FOMC meeting ending on Feb. 2 draws near, and as Fed Chairman Alan Greenspan delivers his congressional testimony later that month. Englund is chief economist for Action Economics


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