Labor Market Strong, But Not Overheating

We see the December jobs report as reinforcing the story that the data have been telling for some time: The labor market is strong and continues to show momentum, but there hasn’t been an acceleration in wage gains that would lead the FOMC to worry that it is behind the curve. Still, the unemployment rate is already below the estimated NAIRU, and payroll gains, even as they moderate, are likely to lead to further declines in the unemployment rate. That labor market outlook, together with underlying inflation not much below its objective already, underpins our expectation that inflation will modestly overshoot in 2019 and 2020 and that the FOMC will raise the fund’s rate somewhat above its equilibrium level. We also see the data as consistent with our call for four rate hikes this year.  

Payroll gains slowed in December, and the 148K increase was below the consensus expectation. There was only a minor downward revision to gains over October and November. The story remains that the trend in payroll gains is strong and consistent with continuing gradual declines in the unemployment rate: Over the last six months, the average pace of gains is a robust 166K per month. Average hourly earnings increased a  solid 0.34% in December following weak readings in November and December, and the 12-month rate remained a moderate 2.5%. There wasn’t much news in the household survey. The U-3 unemployment rate remained at 4.1%, meaningfully below estimates of the NAIRU, and the participation rate remained at  62.7%. The broader U-6 rate edged up a tenth, to 8.1%. 

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