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Employment Ends Year With Solid Gains

RFP
Payroll employment rose by 145,000 in December, well in line with our expectation for 150,000 gains. Private payrolls edged up 139,000 for the month. Employment gains for the previous two months were revised down only slightly.

The biggest surprise was a jump of 41,200 in the hiring of retail workers. The gains were driven by a pickup in hiring at clothing and building material and garden supply stores. The jump followed two months of declines - retail employment peaked in 2017 - and likely reflects the later-than-usual start to the holiday season. Tight labor markets and razor-thin margins meant many retailers held off until the last minute to hire up. The bad news, of course, is yet another surge in retail store closings, which will take a toll on hiring in the retail sector in early 2020. The move up in hiring at building and garden stores likely reflects a more sustainable increase. Home sales and mortgage refinancing picked up in response to rate cuts by the Federal Reserve. The result should be increased spending on repairs and remodeling. Home sales are one of the largest single triggers for consumer spending.

Hires in leisure and hospitality essentially tied the retail sector with 40,000 hires during the month. Food services continued to dominate those gains. The acceleration in wages at the lowest end of the wage spectrum has spurred spending at less expensive, fast-food establishments. Low-wage workers finally have a little extra in their paychecks to spend on discretionary purchases.

Health care hiring moderated slightly to 28,000 after leading gains during many of the previous months. Job shortages have become particularly acute in health care, given the surge in demand tied to the aging demographics. The percentage of the population over 80 years of age, when health problems tend to worsen, is growing rapidly. A rise in retirements by baby boomers, notably nurses, is another hurdle to payroll growth in health care.

Construction picked up in response to unusually mild winter weather. Hires in nonresidential construction were strongest. Much of that reflects a pickup in government spending. Home repairs and remodeling were also strong. We have yet to see a major move up in hiring in the market for new homes; skilled labor is almost nonexistent in the housing industry. This is a legacy of the financial crisis, and the subsequent drought in housing activity that we saw in the years that followed, as well as a drop in immigration. One of the many reasons that construction costs for single-family homes have picked up is the loss of less expensive, immigrant labor.

Manufacturing activity continued to decline aside from the catchup we saw in November tied to the end of the GM strike. Weakness was broad-based. Look for that weakness to persist into early 2020 as production cuts by Boeing tied to problems with the 737 Max ripple through the manufacturing sector. Another hurdle is tariffs, which remain in place for many manufacturers. The phase one deal with China only delayed and rolled back a portion of the tariffs on imports from China.

Average hourly earnings slowed during the month to a 2.9% pace from a year ago, while the gap between supervisory and non-supervisory workers narrowed. Part of that weakness can be attributed to a pickup in wages in late 2018 and early 2019. The base or comparison for year-over-year gains is harder at the turn of the year. That said, the key takeaway from 2019 is that tight labor markets continue to deliver on jobs, but not wages. This has humbled the Federal Reserve, which expected more heat in wages given the low level of unemployment; this is a key reason we expect the Fed to cut again in 2020.

Separately, the unemployment rate held steady at 3.5% in December, a 50-year low. Participation in the labor market also held steady, which is a disappointment. One would hope that more prime-age workers would feel confident enough to reenter the labor force, given how low unemployment has fallen. Prime-age participation has regained much of the ground lost to the crisis and years that followed, but remains well below the highs hit during the 1990s boom. Wages were accelerating much more rapidly during the 1990s than they are today, despite a higher unemployment rate then.

Bottom Line
Payroll employment moderated in 2019 from 2018 along with wage gains. That should not happen with unemployment at such low levels and suggests the Fed will have to cut rates again in 2020. The goal is to both sustain and add heat to what has been a long, but tepid expansion.

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