Labor Market Weakens Dramatically in December

The economy only created 18k new jobs in December (consensus 70k), andthe unemployment rate surged higher to 5% (4.8% consensus). Both aremuch worse than expected. The last time this few jobs were created ina month was back in 2002, and the last time the unemployment rate wasthis high was in 2004. Net revisions for the two previous monthsadded 10k new jobs.
The Fed has indicated in the past that the economy needs to createbetween 125-150k in new jobs per month to keep up with the labor forcegrowth. Earlier in the year, the economy was achieving this goal, butover the past 6 months average monthly new job growth has fallen to87k. Total new jobs created in 2007 were 1.33 million, the lowestannual growth rate in 4 years.
Typically, when the unemployment rate rises by .3, it is viewed as arecessionary indicator. It did that in only one month in December.The unemployment rate has now risen .6% since it hit a low of 4.4%last spring. The household survey showed a decline of 436k inemployment in December, and an increase of 516k in the pool ofavailable labor. The household survey has been very volatile inrecent months, so there is a good chance that the unemployment ratemay decrease next month. The participation rate fell to 665 from66.1%.
The weakness in growth was focused on the private sector, as thegovernment added a better than trend 31k in new jobs in December.Areas showing the most weakness include goods-producing (-75k),construction (-49k), manufacturing (-31k), trade and transport (-28k),and retail trade (-24k). The pace of decline in shedding jobs in themanufacturing and construction industries accelerated in Decemberwhich is not surprising based on the housing and ISM data. Growthremains in the services area, with 93k new jobs added by banks andrestaurants, down from +160k in November. Business services grew by43k, and education/health added 44k new positions.
The workweek held steady at 33.8 hours, though the manufacturingworkweek eased back to 41.1 hours, the shortest in at least sixmonths, and a decline of -.5% from the prior month. Manufacturingovertime slipped by 2/10ths of an hour as well, to 3.9 hours a week.Manufacturing aggregate hours plunged by -.7% MoM, implying furtherweakness in factory output.
Hourly earnings growth fell to the lowest pace in the past year and ahalf at 3.7% YoY. Average weekly earnings also fell from 3.8% annualgrowth in November to 3.4% YoY in December. Slower job growth, andslowing wages, suggest personal spending growth will slow. This is aconcern in an economy so dependent on the consumer for growth.
Though the increase in the unemployment rate in December is huge, anda clear sign of recessionary risks, the overall unemployment rate isstill low at 5%. The slowdown in job creation was broad based inDecember, and certainly suggests the demand for labor is weakening.This data supports the market's expectation of another rate cut by theFed at the end of January. Most are now questioning whether it willbe a 25 or 50bp cut.