Payroll employment rose by 148,000 in December, which on the surface looked like a miss but the fourth quarter was the strongest of the year with the addition of 611,000 new jobs; it was the second-strongest quarter for employment in the last two years. Upward revisions to the previous two months, however, gave us 2.1 million jobs in 2017, which is slightly less than in 2016. October and November included outsized gains as businesses recouped losses related to Hurricanes Harvey and Irma.
Job gains in December were concentrated in three sectors: health care, construction and manufacturing. The gains in health care were mostly in ambulatory and hospitals, which reflects the ongoing aging of the baby boom and some of the previous generation. Many baby boomer nurses are retiring out, which has triggered nursing shortages in some parts of the country. The rise in construction employment showed up with specialty contractors, which reflects a surge in repairs to homes following major storms, added to a pickup in remodeling activity. Many home buyers are frustrated with high prices and the lack of supply of homes to buy so they are opting to add on instead of trading up in the current environment.
Job gains in manufacturing were more broad-based than in the past and less reliant on the vehicle sector alone. This is critical because vehicle sales appear to have reached a peak and are slowing as consumers shift into replacement demand. Many vehicle owners who suffered damages following recent storms and fires were shocked to realize how far “underwater” their loans were when they went to trade in their damaged vehicles. The vehicle industry received a waiver for subprime lending in the wake of the financial crisis. In response, manufacturers extended the length of vehicle loans in the years that followed. That helped juice sales earlier in the cycle but it is taking a toll on sales today.
The two biggest misses in December occurred in government, which was weak, and retail, which is suffering from structural change. Retailers shed jobs despite what was by all reports a banner holiday season. This reflects the shift in spending from in-store to online shopping. Major retailers have already announced more store closings, which suggests that the downdraft in retail jobs will continue as we move into 2018. Many retail analysts are predicting a surge in bankruptcies as restructuring in the sector gains momentum in the months to come. Retail employment actually fell for the entire year in 2017; the last time we saw a annual loss in the retail sector was 2009. The number of actual store closings in 2017 came close to 2009. The offset in 2017 was hiring at specialty store openings and in services for online spending.
Average hourly earnings rose 0.3% in December. Year-over-year gains, however, remained a tepid 2.5%. Part of the problem was an acceleration in average hourly earnings at the end of last year, which makes year-over-year comparisons more difficult. Weak wage gains have been a sticking point for doves at the Federal Reserve. We are looking for some acceleration in wages in 2018 as labor shortages become more acute. For years, employers have been able to treat workers like a commodity; they were willing to endure high rates of turnover given the low level of skills. Going forward, employers will be forced to treat their best workers differently to retain them and offer training to lift their skills to fill positions.
Separately, the unemployment rate held at 4.1%, a 17-year low. Today’s 4%, however, is not the same as we saw at the turn of the century. Participation in the labor force remained unchanged, with a slight improvement in the participation of men offsetting a loss in that by women. The drop in participation rate among women in the U.S. is a new phenomenon; their participation rate now trails that of other major countries, including Japan, which is working to engage more women as their labor force ages. Surveys that track what women do when they are unemployed show that women spend a lot more time at home taking care of children and the elderly, relative to men. Daycare is a particular problem for women in low-wage jobs, something recent tax cuts failed to address.
Bottom Line: The labor market continued to improve in 2017, but without delivering the wage gains we hoped for at the start of the year. Worker shortages are increasing. This suggests that wages will firm more rapidly as employment gains slow in 2018, even with another wave of increases in the minimum wage at the state and local levels.