Jobs Report: Amid Good News, a Darker Cloud

The December jobs report came in this morning, with very good results overall.

• The total number of jobs was up by 252,000, beating expectations of 240,000.
• This continues the streak of months with 200,000-plus jobs created, the longest since the mid-1990s.
• The already strong job gains from October and November were revised up even further, by a total of 50,000 jobs. Add that to the latest results, and you could say we have another 300,000-job month.
• Supporting numbers also improved, with the unemployment rate dropping from 5.8 percent to 5.6 percent—back within what’s considered a healthy range and very close to the Fed’s "natural unemployment rate" of between 5.2 percent and 5.5 percent.

Any way you look at it, the strong employment growth over the past year has brought us back to something resembling a normal labor market. You can make a good case that if we’re not quite there yet, we will be soon.

There’s just one problem . . . wage growth

While today’s jobs news is certainly good, an important aspect of the report isn’t so promising.  

Wage growth has been the missing piece of the recovery thus far, and the numbers this morning represented a step back. Although jobs for November were revised upward, wage growth was revised down, from a strong 0.4 percent to a weaker 0.2 percent; wage growth actually dropped in December by 0.2 percent. Annual wage growth is now down to 1.7 percent, quite close to inflation.

Is something broken here?

Historical relationships and economic theory suggest that wage growth should be picking up. The lack of wage growth in the face of substantial job growth and tightening of the labor market could indicate that something is out of whack.

There are a number of possible reasons for stunted wage growth, among them:

• Well-paid oil workers probably got fewer hours and less pay in December with the crash in oil prices.
• Holiday seasonal adjustments may have skewed the data.
• The Affordable Care Act is no doubt affecting compensation costs, which is bleeding over into wage increases.

I suspect part of the problem is that companies are adding jobs rather than working existing workers more. (The high average weekly hours number—again, at multiyear highs—supports this idea.) If that’s the case, we might see low wage growth continue until we start to run out of workers, which should be toward the end of this year.

In this scenario, lower wage growth would actually be a good thing overall, as it drives more hiring. Nonetheless, wage growth should start to increase reasonably soon, as the unemployment rate declines. In any event, we should be seeing wage growth pick up in the next 12 months, at most.

A bigger worry than before

The overall picture for U.S. growth remains strong, and I still expect wage growth to increase soon. Soon, however, is getting closer and closer, along with the possibility that there may be a crack at the recovery’s foundation. I don’t think so, but today’s data is concerning.

Wage growth just moved up on my worry list.