Highlights:
- December payroll employment jumped a stronger-than-expected 312k — above survey estimates for a ~180k increase
- The unemployment rate ticked up to 3.9% from 3.7% but that is still historically low
- Wage growth strengthened to 3.2% from 3.1% in November
Our Take:
The headline 312k gain in payroll employment, plus 58k worth of upward revisions to the prior two months should calm some concerns about the near-term economic backdrop. The unemployment rate still rose to 3.9% from 3.7%, but that is still historically very low and down from 4.1% a year ago. Evidence continued to mount that tight labour markets are giving workers more bargaining power. Wage growth unexpectedly ticked up to 3.2% on a year-over-year basis—a new cycle high and up from 2.8% in Q3. Combining rising hours worked and wages leaves a pretty solid household income backdrop still in place.
Other economic data has not been quite as good, but also not as bad as might be ordinarily implied by recent financial market volatility. The economy still looks to have ended 2018 growing at an above-potential rate — just not quite as strong as the unsustainable 4% pace over Q2 and Q3. Of course, part of the concern in financial markets is related to uncertainty about the external rather than domestic growth backdrop and possible escalation of international trade disruptions. And the U.S. government shutdown hasn’t helped instill confidence, particularly with a potentially more disruptive debt ceiling debate still to come later this year. Nonetheless, while comments from the Federal Reserve in December suggested policymakers have been somewhat unnerved by recent developments, the U.S. economy still looks to be running above long-run capacity limits while interest rates are still at historically low levels. To be sure, the list of things that can go wrong at this (mature) point in the economic cycle is probably longer than the list of things that can go right, but current conditions still argue that there is room for official interest rates to ultimately grind gradually higher.
