The U.S. December jobs report was exceptional with employment gains of 312,000, rising labor force participation and hours worked, and average hourly earnings growth of over 3% for the third consecutive month.
The average monthly jobs growth in 2018 was 220,000 compared to 182,000 in 2017 and 195,000 in 2016. We expect average monthly employment growth to slow in 2019, but rising labor force participation for prime working-age persons will support further healthy job gains. Monthly job growth around 120,000 is sufficient to keep the unemployment rate under 4%.
The Household Survey was encouraging. It showed that the unemployment rate increased to 3.9% from 3.7%—but very favorably, there was a 419,000 increase in the labor force, leading to a gain of 142,000 in employment and 276,000 in unemployment. The labor force participation rate increased to 63.1% in December from 62.9% in November, as the participation rate for prime working-age persons (25-54 years old) increased to 82.3% in December. It averaged 82% in 2018, a third consecutive year of increase. This is one of the most important—and underappreciated—labor market developments in recent years that explains the stronger-than-expected job growth and moderate wage growth numbers. The larger-than-anticipated declines in the labor force participation rates from 2008-2014 were a major blemish on economic performance, and the re-entrance of people back into the workforce is a win-win in virtually every regard. The rising prime working-age labor force participation rate suggests that the potential labor supply is larger and more elastic than assumed.
The strong job growth was broad-based with the goods sector adding 74,000 jobs, bringing its 2018 total to 624,000 up from 509,000 in 2017 and 82,000 in 2016. Construction employment rose by a strong 38,000 in December despite consistent complaints of labor shortages in the sector, and manufacturing payrolls increased by a robust 32,000. Mining employment rose by 4,000 despite the sharp drop in oil prices. If oil prices remain low, we expect hiring and investment in mining to stall.
Service sector employment rose by 227,000 in December. Service sectors showing above-trend gains included retail (24,000, reflective of the strong holiday shopping season), education and health services (82,000), and leisure and hospitality (55,000). Temporary help services, usually one of the earliest to shed jobs when there is a crisis, continued to add jobs (10,000).
Aggregate hours worked jumped by 0.5%, indicating strong growth. The aggregate weekly payrolls index—a proxy for total personal incomes that combines average hourly earnings, average weekly hours, and employment—jumped by 0.9% supporting strong consumption growth at year-end. Job market performance and its implication for consumption is critically important this year, given the plethora of headwinds for businesses.
Overall, labor market performance surpassed expectations in 2018, boosted by the Tax Cuts and Jobs Act and stronger-than-expected labor force growth reflecting the elevated optimism of households about job-finding prospects. Businesses appear to be looking through the financial market volatility, global growth concerns and uncertainties, and remain confident in the U.S. economic outlook.
Mickey Levy is the chief economist of Berenberg Capital markets, LLC for the Americas and Asia and a member of the Shadow Open Market Committee. The views expressed in this column are the author’s own and do not reflect those of Berenberg Capital Markets, LLC.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.