US December Jobs Report 2012: Post-Cliff Uncertainty Lingers, Fed Likely To Stay Course On Easing

“December’s report doesn’t tell us much more than what we already knew, which is the economy continue to recover and the labor market is adding jobs at a decent but not a great pace,” said Gus Faucher, senior economist at PNC Financial Services Group. “This is not the significant improvement in the labor market that the Fed wants to see before it starts to ease back on the quantitative easing.”

Nonfarm payrolls grew 155,000 last month, the Labor Department said on Friday. That was in line with analysts' expectations of a 150,000 gain and slightly below the level for November. The number of new jobs created in November was revised up to 161,000 from 146,000, while October's figure was revised down to 137,000 from 138,000.

Admittedly, the 155,000 gain is perhaps better than it looks given that firms were probably nervous about adding workers with the fiscal cliff looming. But that gain also included an additional 30,000 construction jobs that were probably a result of the temporary boost from post-Sandy rebuilding. Retail employment actually fell by 11,000 in December, suggesting that the holiday shopping season ended with a whimper. The 11,000 drop in courier jobs also suggests that online shopping was down a little, Capital Economics Chief U.S. Economist Paul Ashworth said in a note.

The private sector added 168,000 jobs to payrolls, while public sector employment fell by 13,000.

Average job growth over 2013 was about 153,000. “We would be bringing down the unemployment rate a lot faster if we are creating 200,000 jobs a month, but I don’t expect that to happen at least in the first part of 2013 because the economy is going to be absorbing the tax cuts that were included as part of the fiscal cliff deal,” Faucher said.

The unemployment rate held at 7.8 percent after the November figure was revised up from a previously reported 7.7 percent. December’s figure was down nearly a percentage point from a year earlier, but still well above the average jobless rate over the last 60 years of about 6 percent.

Some interesting numbers: The participation rate was flat at 63.6 percent, the employment-population ratio rate was flat at 58.6 percent, the number of involuntary part-timer was flat at 7.9 million, and the number of marginally attached workers was flat at 2.6 million.

As it stands now, total nonfarm employment stands at about 134 million, which still leaves us about 4 million jobs short of the peak set right at the start of 2008.

There were some positive signs in this report. Average hourly wages rose 7 cents, or 0.3 percent, to $23.73, something we haven’t seen in a long time, while the average workweek edged up by 0.1 hour to 34.5 hours.

“The positive wage growth and the increase in average workweek will support income growth in the near-term, so certainly that’s good news for consumers and the economy,” Faucher said. Consumer spending drives nearly 70 percent of economic activity.

Nevertheless, the overall picture is that the labor market remains lackluster and the theatrics in Washington over the fiscal cliff has been more about deficit reduction rather than job creation.

“An extension of the social security payroll tax cut for another year would have been a good idea, but it’s too late at this point,” Faucher said. “Overall, the emphasis on near-term deficit reduction has been misguided. What we really should be focusing on is longer-term deficit reduction and how we are going to pay for the retirement of the baby boomers.”

Uncertainty Lingers

The last-minute deal to postpone America’s fiscal cliff had markets rejoicing, initially. But that joy was short-lived.

“They pushed out many of the hard decisions,” said Kate Warne, investment strategist at Edward Jones. “We are likely to see some market volatility over the next few months, particularly as Congress starts talking about what it might do in the way of spending cuts.”

The delay in sequester budget cuts until March 1 coincides with a need to reach an agreement to raise the debt ceiling and the expiration of the legislation to fund the federal government at current levels on March 27. This raises the risk that further cuts to federal spending will go into effect in 2013 as a concession to raise the debt ceiling.

“This debate will re-introduce uncertainty to financial markets and will likely weigh on business and consumer confidence,” John Silvia, chief economist at Wells Fargo, said in a note.

“The good news is that the worst-case scenario of an immediate slide back into recession has been avoided, and we do have a little more certainty about taxation,” Ashworth said. Most of the original Bush tax cuts have been made permanent and the threshold for the alternative minimum tax will be indexed for inflation every year.

That said, economists had hoped that a comprehensive agreement would prompt a wave of spending by households and businesses that are currently sitting on the sidelines due to uncertainty about fiscal policy. “Instead, we have another potentially very disruptive budget battle coming soon, so any upside risk to our forecast from pent-up demand may now have gone, for a few more quarters at least,” Ashworth said, adding that he expects gross domestic product growth of only 1.5 percent for the first three months of 2013, and around 2 percent for the full year.

“With little prospect of any meaningful action to address the medium-term budget problems, we suspect that the U.S. will suffer further credit rating downgrades this year,” Ashworth said.

Federal Reserve

The Federal Reserve made it plain during its December policy meeting that job creation had become its primary focus, announcing that it planned to continue suppressing interest rates so long as the unemployment rate remained above 6.5 percent.

According to the Fed’s economic projections, most of its senior officials did not expect to reach the goal of 6.5 percent unemployment until the end of 2015.

However, the minutes of the December Federal Open Market Committee meeting released Thursday revealed that Fed officials might end quantitative easing sooner than the markets were expecting.

Officials were concerned that "the benefits of ongoing purchases were uncertain and ... the potential costs could rise as the size of the balance sheet increased."

The Fed is now buying $85 billion of Treasury securities and agency mortgage-backed securities each month, which adds up to roughly $1 trillion per year. As a result, the Fed's already bloated balance sheet will increase by about 40 percent in 2013.

“Officials are worried that such an expansion could prompt a surge in inflation expectations and would make it more difficult, when the time eventually came, to implement any exit strategy,” Ashworth said.

According to the minutes "a few members" thought that the purchases should continue until the end of 2013, while "several others" thought they should be stopped "well before" the end of this year, and one member opposes them altogether.

In standard Fed language, a few means two or three, while several might be four or five. That suggests the committee is evenly split. New voting members will rotate on to the FOMC in 2013 but they are unlikely to change its behavior much.

Given that the Fed isn't expected to start raising interest rates from near-zero until mid-2015 or even later, most commentators had expected the asset purchases to continue well into 2014.

“Ultimately, it is the prevailing economic conditions that will determine when the Fed halts or slows the pace of its asset purchases,” Ashworth said. “We suspect that another year of lackluster economic growth in 2013, coupled with only a modest improvement in the unemployment rate, will persuade the Fed to sustain QE into 2014.”