The December payroll number (74,000) was such a disappointment, it seems incredible.
The vast majority of December economic data points suggested that the pace of economic growth is accelerating, and that the job outlook is improving. Indeed, today’s payroll release seems like a significant anomaly relative to other recent indicators. Some suggest the weakness was related to weather. True, this may partially explain the lack of job growth in some sectors such as construction, but lackluster hiring in December was broad-based across industries.
We are not overly concerned by the apparent lack of hiring that was reported. Monthly payroll numbers are notoriously volatile, and as we have noted in recent Insights, the fundamental supports are in place for a more vigorous payroll expansion. Indeed, our payroll model suggests that 1.5%-2% annual payroll growth is achievable over the next 6-12 months.
Admittedly though, the ongoing contraction in the labor force is concerning. At this point in the recovery, we would have expected that improving economic fundamentals would have triggered some rebound in the participation rate, as discouraged workers re-join the labor force. The continued slide in participation suggests that structural factors remain more potent than cyclical factors. As a result, the unemployment rate, which dropped to 6.7% in December, despite paltry hiring, is heading quickly towards the Fed’s 6.5% threshold for considering rate hikes. No wonder then that that the Fed, in its latest FOMC meeting, signaled that interest rates would not change until “well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”
The bottom line is that we are not concerned that today’s payroll report challenges our forecast for improving growth in 2014. However, the volatility of the employment data once again highlights the difficulty of tying policy decisions to a specific indicator.