December Employment Expected to Slow

Payroll employment is expected to show a 150,000 gain for December. Health care, leisure and hospitality and professional services are expected to lead those gains. Construction should also pick up in the specialty residential space in response to the recent spurt in new home construction. Mild winter weather across much of the country should be a plus on that front.

The drag will come from manufacturing and retail. The ISM (Institute for Supply Management) manufacturing survey continued to contract in December as employment was cut, largely in response to the weakness we are seeing abroad and ongoing trade wars. Retail is suffering on two fronts: razor-thin margins and the shift in consumer preference from bricks to clicks. Announcements of store closings have already picked up in January with Pier 1 Imports alone planning to close up to 450 stores.

Average hourly earnings are expected to have risen 0.2% from November to December. That translates to a 3% gain on a year-on-year basis, a slowdown from the 3.1% gain we saw in November. Year-on-year gains are expected to be a bit more difficult over the next two months because wages accelerated at the start of 2019.

Separately, the unemployment rate, which is derived from the household survey, is expected to hold at 3.5% in December. Participation in the labor market is expected to have risen slightly in December as more workers threw their hats in the ring. Tight labor market conditions are giving people who once gave up a second chance. Even people who were on disability are rejoining the labor market.

The rise in labor force participation is key for the Federal Reserve. Sustaining what has become a marathon of an expansion with a sharp acceleration in wages for the lowest paid workers is one of the few ways that the Fed can help make the expansion more inclusive.

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