(Bloomberg) - January 4, 2019 - The U.S. job market delivered a blowout performance in December, giving a clearer signal that the economy is on solid footing even as investors fret about the trade war and other risks in 2019.
U.S. stocks and Treasury yields surged Friday after Labor Department figures showed employers added the most workers in 10 months, wage gains accelerated and labor-force participation jumped. Contrast that with the drumbeat of bad news in recent days, highlighted by the plunge in a closely-watched gauge of manufacturing and several big companies warning of slower revenue.
Across-the-board strength in the job market -- the linchpin of the recent spurt in economic growth -- will support further gains in consumer spending, the biggest part of the economy. That’s key, at a time the tariff war with China has cast a shadow over U.S. manufacturing and the global outlook, one reason why investors were betting before Friday’s numbers that the Federal Reserve would stay on hold or cut interest rates, rather than keep raising them.
“The labor market is as strong as it’s been since pre-crisis times,” said Michael Gapen, chief U.S. economist at Barclays Plc. “The basic fundamentals of the economy are still solid. Therefore markets should expect the Fed’s policy rate to still go higher. How many more times, and when, is debatable, but this is not a report that tells the Fed they should just be on pause forever.”
Nonfarm payrolls increased by 312,000 in December, easily topping all forecasts, after an upwardly revised 176,000 November gain. Average hourly earnings rose 3.2 percent from a year earlier, topping projections and matching the fastest pace since 2009. Meanwhile, the jobless rate rose from an almost five-decade low to 3.9 percent, reflecting more people actively seeking work.
Still, economists say it’ll be hard to replicate such employment gains in 2019, as they expect gross domestic product growth will moderate amid the trade war and a fading boost from the Trump administration’s tax cuts. A shortage of skilled workers, softening manufacturing activity, a housing slowdown and a projected cooling in global growth also are headwinds.
Fed Chairman Jerome Powell, speaking Friday in Atlanta, praised the jobs numbers and said U.S. economic data are on track for good momentum into the new year. He noted broad wage gains, and said officials would be patient and prepared with flexible policy.
While Fed officials last month penciled in two interest-rate hikes for 2019, they may need more evidence of strength before moving forward with the next increase following four in 2018.
The jobs data probably brought a “huge sigh of relief on Constitution Avenue,” the site of the Fed’s headquarters in Washington, said Torsten Slok, chief international economist at Deutsche Bank AG. The central bank chairman can “easily justify” additional hikes, Slok said on Bloomberg Television.
The 2018 payrolls tally of 2.64 million was the most since 2015 and followed 2.19 million in 2017.
President Donald Trump cheered “GREAT JOBS NUMBERS” on Twitter while his chief economic adviser, Larry Kudlow, said told Bloomberg Television that there’s “no recession in sight” following the “blowout” report.
The labor strength spanned most industries, including the biggest gain in construction since February, and the most manufacturing jobs added in a year. Private service providers boosted payrolls by 227,000, the most in more than a year, amid gains in education and health services, leisure and hospitality, and retail.
While the unemployment rate increased to a five-month high, it may not be much of a concern because the participation rate rose to 63.1 percent -- the highest since September 2017 -- from 62.9 percent. The jobless rate remains well below the level that central bankers consider sustainable in the long run.
Average hourly earnings for all private workers rose 0.4 percent from the prior month after a 0.2 percent gain. The annual increase followed a 3.1 percent advance.
Another measure, average hourly earnings for production and non-supervisory workers, increased 3.3 percent from a year earlier. While worker pay rose very gradually during most of the economic expansion, companies are now competing more vigorously to attract and retain workers.
“The economy is still chugging along, so there’s a difference now between how the market seems to be feeling and what’s actually happening in the labor market,” said Martha Gimbel, research director at jobs website Indeed’s Hiring Lab and former economist at the Labor Department and Council of Economic Advisers. “While there’s been a lot of recession talk recently, people need to remember that these things don’t happen instantaneously.”
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