The U.S. economy added 199k new jobs in December, disappointing market expectations for a 400k+ tally. However, the prior two months was revised up by 141k positions, continuing a trend. Even with an average 537k new jobs per month in 2021, payrolls remained 2.3% below their February 2020 level, or 3.6 million fewer jobs.
The unemployment rate dropped to 3.9% in December, narrowing in on its 3.5% pre-pandemic low, as household survey employment rose 651k. Household survey employment has been stronger than payrolls for a couple of months now, and is 1.8% below its pre-pandemic level, a smaller gap than indicated by the payroll measure. The labor force participation rate was unchanged from November at 61.9%. However, November’s part rate was revised up as part of the usual annual revisions to the seasonal factors.
Looking at shifts by industry, employment continued to trend up in leisure and hospitality (+53k), professional and business services (+43k), manufacturing (+26k), transportation and warehousing (+19k) and construction (+22k).
Average hourly earnings were up 4.7% from a year ago in December, as a healthy demand for workers is driving wages higher across sectors.
Key Implications
The jobs numbers are typically the most highly anticipated release on the calendar but December’s data was captured prior to the surge in Omicron infections, so it feels a bit more stale than usual. We will have to wait until January to see what, if any, impact Omicron has on employment. Consumer caution is likely to dampen activity in some sectors, but given a tight labor market, employers are likely going to hang on to staff. Disruptions from large swaths of infected workers are likely to disrupt activity more than employment.
Despite the disappointment with the headline hiring tally, December’s data are consistent with a labor market that is looking pretty tight. Markets may need to recalibrate monthly hiring expectations going forward. Given limited labor market slack, the pace of hiring may look more like pre-pandemic trends going forward. The pace of job gains through November and December is in fact quite similar to the pace of hiring immediately before the pandemic. With the unemployment rate getting quite close to its pre-pandemic low and inflation higher than the Fed would like, rate hikes are likely not too far away, as outlined in our recent forecast. Omicron may prove disruptive in the short run, but as with past waves, we expect activity to bounce back quickly.
