U.S. December Payroll Employment Rose Stronger than Expected with the Unemployment Rate Continuing

• December non-farm payroll employment rose a stronger than expected 200,000 following revised gains in November and October of 100,000 (was 120,000) and 112,000 (was 100,000), respectively.
• The unemployment rate unexpectedly dropped to 8.5% from 8.7% in November, previously reported at 8.6%.
• Government jobs fell 12,000 with private payrolls up 212,000 in the month following gains of 120,000 and 134,000 in November and October, respectively.
• Indications of strengthening employment and a falling unemployment rate provide welcome news to the Fed; however, despite this month's improvement, the unemployment rate still remains at a high level. To assure that this slack in labour markets continues to be absorbed, the central bank is expected to keep monetary conditions highly accommodative and may yet add further stimulus to the system.

Payroll employment in December rose 200,000, which was above market expectations for a 155,000 gain following revised increases of 100,000 (was 120,000) and 112,000 (was 100,000) in November and October, respectively. Also providing indications of improving labour markets was the unemployment rate unexpectedly dropping to 8.5% from 8.7% in November. (Revised seasonal factors for the household survey data provide a smoother pattern for the unemployment rate that now shows it dropping from 9.0% to 8.9% to 8.7% over the period September to November, respectively. Previously reported numbers showed a pattern of 9.1%, 9.0%, and then a plummet to 8.6% over the same period.)

The overall increase in payroll employment was once again restrained by declining government employment, which fell 12,000 in the month. Thus on a private-sector basis, employment was up 212,000 in December following gains of 120,000 in November and 134,000 in October.

The increase in private employment reflected relatively broad-based gains. On the goods-producing side of the economy, 48,000 new jobs were created; while on the services side, employment rose 164,000. The increase in the former was led by gains in manufacturing of 23,000 and construction of 17,000. The increase in services was led by a 50,200 surge in transportation and warehousing along with a 27,900 jump in retail trade, thereby reflecting robust hiring for the Christmas sales period as it follows a 38,800 gain in November.

The hours worked component of the report also indicated strength rising to 34.4 hours from 34.3 hours in November. Manufacturing not only showed rising jobs but also a longer workweek as it rose to 40.5 hours from 40.4 hours in November. The combination of rising employment and a longer workweek sent the index of aggregate weekly hours up a strong 0.5% that more than reversed the 0.2% drop in November. This implies solid momentum going into the first quarter of 2012.

The index of average hourly earnings, the principal wage measure in the report, rose 0.2% in the month and 2.1% over the year. The annual rate is up from 1.9% in November 2011 and has not been above 2% since July 2011. On one level, this implies some inflation pressure as labour markets tighten although the rate of increase is still modest. As well, it has positive implications for income growth and thus should provide needed support to consumer spending going into 2012.

The rise in employment and drop in the unemployment rate in December provide further evidence that the US economy picked up in the fourth quarter of last year, showing encouraging resilience to the effect of the ongoing European debt crisis and uncertainty about the path of future, domestic, fiscal consolidation. As well, the recent downward trajectory for initial jobless claims during the latter half of December is consistent with positive momentum being maintained early in 2012. With that said, the unemployment rate still remains historically high and serves as a reminder both of the modest pace recovery in labour markets to date and of the vulnerability of the US economy as a whole to a potential deterioration in financial market conditions should the European sovereign-debt problems significantly intensify. To encourage stronger momentum in labour markets, the Fed is expected to keep monetary policy highly accommodative, potentially even opting to further asset purchases should a further deterioration in European financial markets begin to weigh more heavily on US growth prospects.

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