December 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added 312,000 jobs in December -- well above expectations of +190,000. In addition, combined October and November employment gains were revised up by 58,000 (October: +21,000; November: +37,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) rose to 3.9% as only roughly one-third (142,000) of the 419,000 new/re-entrants to the labor force found work. 

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Observations from the employment reports include:

* Despite being directionally consistent, the establishment (+312,000) and household (+142,000) survey results were poorly matched in December.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors. December seems to be such a case, as all of the job gains originated with the seasonal adjustment factor; we become somewhat concerned about the accuracy of the headline number whenever the CES (business birth/death model) and/or seasonal adjustments dwarf the initial value. That said, had average (since 2000) December adjustments been used, job gains might have amounted to a still-respectable +297,000.

* As for industry details, Manufacturing gained 32,000 jobs in December. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded -- albeit at a slower pace in December. Wood Products employment shrank by 1,100 jobs (ISM unchanged); Paper and Paper Products: +1,800 (ISM declined); Construction: +38,000 (ISM not published).

* As a related point, there are 904,000 fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 2.41 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. On a more positive note, however, the gain in manufacturing employment has been outpacing that of FS&DP jobs since July 2017; in 2018, manufacturing added 284,000 jobs while FS&D jobs expanded by 235,400. 

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* The number of employment-age persons not in the labor force (NILF) retreated by 237,000 -- to 95.6 million, or within 0.7% of August 2018’s record high. Meanwhile, the employment-population ratio (EPR) remained unchanged at 60.6%; roughly, then, for every five people being added to the population, only three are employed. 

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* Given the number of people (re)entering the labor force, the labor force participation rate (LFPR) bumped up to 63.1% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.11, to $27.48, resulting in a 3.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.09, to $23.05 (+3.3% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded by 0.1 hour (to 34.5 hours), average weekly earnings increased by $6.53, to $948.06 (+5.2% YoY). With the consumer price index running at an annual rate of 2.2% in November, workers are -- officially, at least -- gaining purchasing power. 

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* Full-time jobs advanced by 139,000; there are now 8.0 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 25.7 million. Those employed part time for economic reasons -- e.g., slack work or business conditions, or could find only part-time work -- fell by 124,000; part time for non-economic reasons: +325,000. Those holding multiple jobs rose by 117,000. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in December jumped by $47.9 billion, to $234.0 billion (+25.7% MoM, and +1.6% YoY). To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending December was unchanged from the year-earlier average -- well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.