Written by: Frank Fazio
The U.S. economy produced 148,000 jobs for the month of December, coming below economists’ expectations of 190,000. October figures were revised lower while November was revised higher, for a net downward revision of 9,000 jobs. Still, this helped the economy achieve its seventh consecutive year of producing more than 2 million jobs. The 12-month average ended the year just above 170,000 jobs created per month, which is slightly below the 180,000-monthly average for 2016. Economists look at payroll gains above 100,000 a month as the level to keep putting downward pressure on the jobless rate. The Unemployment Rate held steady in at 4.1% in December versus 4.7% at the end of 2016, and remains the lowest reading since December 2000.
Wage growth came in better than expected for the month, which held steady at a 2.5% annual growth rate versus an expected 2.3% rate of growth. This continues to be a focus of the Federal Reserve, who are tying monetary policy to movements in wages. Although encouraging to see an uptick as the year ended, if wages fail to accelerate from these levels it may cause the Federal Reserve to slow down the pace of rate hikes in 2018. Market expectations were pricing in an 80% probability of a rate hike when the Fed meets in March, which remained unchanged after today’s report. Medium- to long-term bond yields declined after the report but rose throughout the day, which helped to widen the spread between short term and intermediate-term bond yields. This indicates rising expectations for economic growth over the next 5-10 years.
Similar to last month’s labor report, it may be a positive sign for further equity appreciation, as it signals the economy continues to move towards full employment but slower wage growth may result in slower pace of rate hikes than expected in 2018. Low interest rates, coupled with now lower corporate taxes, may result in further expansion in earnings as we head into 2018. We will continue to monitor the pace of wage growth in our assessment of the economy and potential for tighter monetary policy from the Federal Reserve in 2018.