Soft wage gains suggest Fed can remain on hold

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Nonfarm payrolls gained a less-than-expected but respectable 145,000 in December, and the unemployment rate held at 3.5%, but slow growth in wages suggests the economy will not overheat and the Federal Reserve can maintain rates.

The Labor Department also revised October and November’s gains down slightly (by a total of 14,000). Average hourly earnings gained 0.1% in December, after rising 0.2% the month before.

Economists polled by IFR Markets expected 160,000 new jobs, a 3.5% unemployment rate, and a 0.3% rise in hourly earnings for the month.

“While below expectations, this is still a very solid number and a fitting way to close out what has been a decade of slow, but steady, economic growth,” said Tony Bedikian, head of Global Markets at Citizens Bank.

“The most important takeaway in my view: the broader measures of unemployment continues to improve, yet wages remain softer than expected,” said Payden & Rygel Chief Economist Jeffrey Cleveland. “Conclusion: no signs of ‘overheating,’ the labor market has room to tighten future in 2020. We aren’t at the unemployment ‘lows’ yet and there’s certainty no need for the Fed to move to tighten monetary policy based on the inflation outlook,” so “monetary policy will remain easy for the foreseeable future.”

After the revisions, nonfarm payrolls grew an average 184,000 the past three months. “Not bad at all considering we’re now in year 11 of the economic expansion,” Cleveland said.

Although fewer jobs were created in 2019 than a year earlier, 2.1 million jobs were added.

“The broadest measure of unemployment (and our choice for the ‘real’ unemployment rate), the U-6 measure, fell to 6.7% in December — both a new cycle low and a new all-time low,” he added.

While average hourly earnings rose just 2.9% in the year, given low inflation, “real wage growth is positive.”

Despite a slower economy, “the jobs market has proven to be more resilient than anyone expected,” according to Steven Rosen, CEO of Resilience Capital Partners. “The expansion is aging, and will need a boost to keep going.”

In addition to the “disappointing” wage gains, “the labor participation rate, holding steady at 63.2%, has continued to remain in a narrow band despite the low unemployment rate — another somewhat disappointing trend.”

But the market’s “relative strength … bodes well for next year, when the Fed’s rate cuts and the easing of trade tensions could provide oxygen for an aging expansion,” he added.

The steady unemployment rate “shows welcome consistency that demonstrates an underlying resiliency of the job market,” Rosen noted, suggesting there won’t be “a serious downturn this year.”

Yet not all is well. “The 12,000-job decline in manufacturing jobs … wasn’t a surprise,” he said. “Manufacturing has been hit hardest by the trade wars. However, we’re hearing positive signals from the manufacturing companies we own, and believe the sector is finally turning around.”

And while “things look positive now,” employers should not ignore “the threat of war, trade tensions and a global economic downturn.”

The numbers show “the U.S. economy and labor market have weathered trade tensions,” said Charles Seville, co-head of Americas Sovereigns at Fitch Ratings. “With little sign of an acceleration in wage growth, policymakers are likely to be content with a steady policy rate.”

“While disappointing, the employment figure doesn’t reflect a significant deviation from the growth trajectory expected for this year,” noted Beth Akers, Manhattan Institute senior fellow and former Council of Economic Advisors economist. “While it indicates slower growth than anticipated for December, the deviation from expectations is likely not significant enough to push the Federal Reserve to reconsider their current strategy of holding rates steady in the short run. Part of the challenge of adding new jobs this late in an expansionary period is that the number of available and qualified workers is dwindling.”

While the report could account for a “bump in hiring that might have resulted from Trump’s initial announcement of the Phase 1 trade deal with China,” she said, it “does not take into account the significant turbulence inside the Beltway during that the past few weeks. Next month, we’ll be watching for any further effects of optimism driven by the trade deal with China, pessimism driven by concerns about tension with Iran, and uncertainty created by the ongoing impeachment process.”

"The jobs number was neither horrible nor expletory," according to Marvin Loh, senior global macro strategist at State Street Global Markets . "It provided a dose of reality."

Weakness in manufacturing and private employment drove the miss from consensus, he noted, as manufacturing lost 12,000 jobs compared to expectations for 5,000 created and private added 139,000 versus a 153,000 estimate. "Since phase 1 has not been signed yet, the market will be patient to see if lower tariffs on both sides drive gains in manufacturing," Loh said. "Encouraging was that the big prior month number was not significantly revised, so some of the end of year gains are being sustained.

"Overall, this is a good employment report given that we are moving towards the 11th year of the current expansion," he added. "It is strong enough to continue to push the unemployment rate lower and keep the expansion going. It will not change Fed policy, which remains on hold and the FOMC will wait and watch to see how trade and global growth reacts."

The report offered "Something for everybody," said Rich Piccirillo, senior portfolio manager at PGIM Fixed Income. "Slightly weaker than expected with nonfarm payrolls lower than consensus, and average hourly earnings lower than expected both on a monthly and yearly basis, but the U-6 underemployment rate declined from 6.9% to 6.7%. A record low, and an indicator which many believe is a better indicator of employment."

It is natural that job growth would slow "this late in the cycle," he added, "but slower wage growth diminishes inflation fears."

Separately, the Commerce Department said wholesale inventories dipped 0.1% in November after a 0.1% rise in October. Sales gained 1.5% after a 0.9% drop a month earlier.

Late Thursday, Federal Reserve Bank of St. Louis President James Bullard said, “The [Federal Open Market Committee] has a reasonable chance of achieving a soft landing for the U.S. economy in 2020 following a large adjustment to monetary policy during 2019.”

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