Politics & Policy

Nothing Weak About It

Another impressive "below-expectations" jobs report.

December non-farm payrolls rose by 108,000, about half the expected increase of 200,000, according to the Bureau of Labor Statistics. However, November non-farm job growth was revised up to 305,000 from 215,000 while job growth for October was revised down by only 19,000. In total, net jobs gains were revised upward by 71,000.

The unemployment rate dropped to 4.9 percent from 5 percent, which is consistent with rising real wages over time. At the same time, 12-month job growth in the department’s household survey (a broad employment gauge that includes start-ups and the self-employed) remains considerably larger (217,000) than the 12-month job gains recorded by the more-often cited establishment (or payroll) survey (168,000). History shows that such gaps typically unwind with stronger payroll job growth.

Average hourly earnings for non-supervisory production workers (low-end wages) rose 0.3 percent month-over-month and are up 3.7 percent at an annual rate during the last three months. Low-end wages should continue to rise as the labor market tightens, since unemployment in current ranges (or lower) is consistent with rising real wage rates.

During the last year, total employment has risen by 2 million according to the establishment survey and by 2.6 million according to the household survey. While some will continue to bemoan this job growth as “weak,” I would argue that it is quite strong when one considers non-farm productivity growth, which averaged 3.3 percent during 2005. Going back further, total job creation has risen by 4.6 million (establishment survey) since the retroactive tax cuts passed in May 2003, while unemployment has fallen below 5 percent from rates above 6 percent. With productivity growth averaging 3.7 percent (quarterly annualized rate) during this period, job growth looks even more impressive.

Despite weakness in hours worked during the fourth quarter (which should be temporary), the product of hours worked and low-end wages (one proxy for low-end income) is up 5.3 percent year-over-year. This is above the 15-year average of 4.5 percent and still beats both headline and core inflation.

As the recovery deepens and broadens during 2006, I expect the unemployment rate to drop further, hours worked to rise, and wage gains to accelerate. This also would be consistent with a tapering off in the torrid rate of productivity and profitability witnessed during the last 16 quarters. In other words, labor should begin to see the fruits of profits and productivity growth, two areas in which this recovery cycle has been one of the strongest on record.

— Michael T. Darda is the chief economist and director of research for MKM Partners, an equity execution and research boutique located in Greenwich, Conn. He welcomes your comments here.

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