Employment Ends 2018 with a Boom

Payroll employment jumped 312,000 in December, after being revised up for the month of November. Gains were broad based and driven by strong health care, robust holiday spending, and the clean-up following devastating fires in California. The largest increases were in healthcare, where labor shortages have become acute with the growth in the aging of the population. Much of those gains were in ambulatory care.

The pickup in food service and drinking places was a residual of rising wages and lower prices at the pump. Consumers largely shrugged off stock market volatility as the holidays approached. The disappointment was in business travel, which slowed more than expected according to recent reports by the airlines, as consumers focused more on the holiday season than year-end deals. Reports of curbs to business travel have also increased in recent months, as the pinch from tariffs intensifies.

Retail trade also posted strong gains, as retailers stepped up their game to compete with behemoth Amazon to deliver products from online sales as well as in store pickups. Department stores actually hired more than big box discounters and warehouse clubs. This marks a departure from much of the pattern seen during the expansion. Low-wage workers saw strong increases in their paychecks during the holiday season, and they returned to shopping at their favorite stores. Retailers saw increases in both online and instore sales; anecdotal reports suggest that returns were down this season, another sign of holiday strength.

Construction picked up, most notably on public sector projects. At least a portion of those gains was due to repairs and cleanup efforts following the California fires and earthquake damages in Alaska. The shift from single family to multifamily construction continued, with the bulk of the gains in specialty construction workers in the commercial rather than the residential sector.

Professional services continued its upward trend, with more full-time than temporary hires. Technical and administrative remained particularly strong. Administrative assistants are finally back in demand and are getting paid more.

Average hourly earnings surged 11 cents or 0.4% in December on the heels of overtime pay and a pick up in pay for seasonal workers. Year-over-year gains accelerated to a 3.2% pace, matching October for the strongest wage gains in nearly a decade. Some of the largest retailers such as Amazon raised their entry-level pay ahead of increases in the minimum wage, slated to go into effect in 19 states on January 1, 2019. This had ripple effects on low-wage earners across the board. Employers in Dallas were complaining about having to compete with the $15 per hour Amazon pay rate in the Federal Reserve’s recent Beige Book.

Separately, the unemployment rate moved up by two ticks to 3.9% in December from 3.7% in November. The increase was for all the right reasons. Participation in the labor force jumped to 63.1%, its highest level since 2013, when participation in the labor force was still falling instead of rising. Women continued to drive the increases. Some of that is compositional, with more women employed in ambulatory care and entry-level retail. There has also been some research suggesting that men are finding greater hurdles filling jobs previously dominated by women. The stickiness of the participation rate among men, however, remains worrisome. Manufacturing and construction were the hardest hit by the financial crisis, sectors dominated by men. Those workers have now suffered the longest unemployment, and erosion of skills. Anecdotal reports suggest that they are also having a harder time passing drug tests than their female counterparts. This is occuring at the same time that millenial women are outperforming their male counterparts on educational achievements, making them more employable.

Bottom Line
Labor markets accelerated even as the stock market faltered at year end. Wages also picked up. Those two shifts should alleviate the criticism that has been pummelled at the Federal Reserve in recent weeks. This employment report is better than anyone on the Federal Open Market Committee (FOMC) could have imagined when they raised rates a fourth time in December. The concern is whether the Fed can pivot fast enough if the recent weakness in the stock market and abroad takes hold. Look for Chairman Powell to affirm that the Fed continues to “monitor” economic conditions, and will do what is needed to pace the expansion. That means rate hikes when growth is robust, and a pause as growth slows, which is expected as we enter 2019.

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