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December jobs report: Show me the money
Andrew Szczurowski, Portfolio Manager, Global Income Group
Boston - In honor of the 20th anniversary of Jerry Maguire, wage inflation at seven-year highs and Cuba Gooding Jr.'s 49th birthday this week, this seems like a fitting title.
Another decent labor report in December, with the U.S. economy adding 156k jobs in the month, a bit below its recent trend, but still well above what is needed to keep up with growth in the labor force. The most import aspect of the report was the continued rise in average hourly earnings, which rose 0.4% month over month and 2.9% year over year (highest YoY number since 2009).
2017 will likely be the year the market stops focusing so much on the headline job gains in the report, and starts focusing on wage inflation. With 5.5 million job openings according to the JOLTs report, the biggest thing holding the economy back from larger headline job gains is likely the lack of supply. Next month we will likely get a slight decline from 2.9% as we roll off a very strong 0.5% average hourly earnings print from last January. But after that, the upward trend in wages should resume due to the continued tightening labor market. Although less than 5% of the workforce makes minimum wage, there also should be a decent tailwind in the next few months for wage inflation from minimum wage hikes, which went into effect in the new year for 21 different states.
The biggest surprise in the report was the manufacturing sector added 17k jobs in December, after job losses the previous four months. Perhaps the gains were a payback from the uncertainty an election year brings, or perhaps Trump can tweet his way to making the manufacturing sector great again.
The unemployment rate did rise from 4.6% to 4.7%, but this comes on the back of a 0.2% decline last month. Another positive sign was the underemployment rate fell from 9.3% to 9.2%, another sign more slack continues to be removed from the labor market, and a good sign for future wages.
Bottom line: This was a very solid report and if we continue to see wage gains and inflation rising over the next few months, it will put more pressure on the Federal Reserve to get on with another rate hike as early as March. The market is currently only pricing in two rate hikes for 2017 and it is looking like this may finally be the year the market has to play catch-up with the Fed (currently projecting three rate hikes), instead of the other way around. If the market does start to price in more rate hikes, look for continued bear flattening in the Treasury curve, as the shorter end underperforms.