Businesses probably added new jobs in December at a slightly faster pace than the prior month, showing some resilience even as a potential budget crisis loomed. Recovery efforts following Superstorm Sandy may also have helped the U.S. job market end 2012 on a solid note.
“I think we are going to see a pretty much in-line number (for December),” said Kate Warne, investment strategist at Edward Jones. Payroll gains in the first 11 months of 2012 have averaged about 151,000 a month compared with 147,000 in the same period of 2011.
The Labor Department will release the December jobs data on Friday at 8:30 a.m. EST. Economists expect nonfarm payrolls to show a gain of 150,000, compared with the 146,000 jobs created in November. Projections provided by the 55 economists polled by Thomson Reuters ranged from a gain of 80,000 jobs to a gain of 225,000.
“Jobs report with around 150,000 jobs created (in December) would actually cap a solid but not wonderful year for the job market,” Warne said.
The unemployment rate may have held at 7.7 percent last month -- the lowest since December 2008.
The U.S. has recovered 4.6 million of the 8.8 million jobs lost as a result of the 2008 recession. About 12 million people were counted as unemployed in November, down from 12.3 million a month earlier.
The Labor Department’s report on Jan. 4 is projected to show that private employment, which excludes government agencies, climbed by 148,000 in December following a 147,000 increase, economists predicted.
A new report released Thursday from payroll giant ADP showed that the private sector created 215,000 new jobs in December, beating expectations, as construction surged and businesses of all sizes added workers. November’s figure was revised higher to 148,000 from 118,000.
It is possible that the pick-up in ADP’s measure of private-sector employment growth reflects a one-off bounce back as the disruption from Superstorm Sandy faded. The 39,000 increase on construction sector employment could be linked to the rebuilding effort.
While the ADP numbers came in stronger than expected, economists point to seasonal adjustments in past Decembers and warn that the figures should be taken with a grain of salt.
“It's notable that employment growth jumped to 294,000 in December 2011, from 173,000 the month before, and 240,000 in December 2010, from 154,000,” noted Capital Economics Chief U.S. Economist Paul Ashworth, who is calling for an above-consensus gain of 175,000 jobs for last month. “The problem is that the gains then dropped back to 219,000 in January 2012 and 162,000 in January 2011.”
Barclays Capital Economists Cooper Howes doesn’t think the recent changes to the ADP report, which brought it more in line with past Bureau of Labor Statistics data, has made it more useful for forecasting the BLS series.
“December’s employment number is likely to be decidedly anticlimactic after the nail-biting year-end budget negotiations of the past few weeks,” said Robert C. King, an economist at the Jerome Levy Forecasting Center. “A bad number is likely to be peremptorily discarded as having been weighed down by fiscal cliff uncertainty, and a decent number will be viewed as a success for the same reason.”
“The resolution of the tax issue has left us with a still sizable fiscal pothole, which will weigh on consumer spending in the first quarter,” King said. “The widely expected bounce-back in business hiring and investment next year may prove disappointing.”
The last-minute deal to postpone America’s fiscal cliff had markets rejoicing, initially. But that joy tapered off sharply Thursday.
“They pushed out many of the hard decisions,” Warne said. “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.
Modest Rebound In Manufacturing
The Institute of Supply Management's monthly reading on the U.S. manufacturing sector came in at 50.7 in December, moving the index off its 2012 low of 49.5 in November. The December expansion marked only the third time the sector grew in the last seven months.
Factories have continued to hire, a welcome sign ahead of the monthly employment report on the U.S. job market due out Friday. The ISM employment index increased by 4.3 percentage points last month.
Business confidence has firmed slightly, but it seems as though there is a lack of conviction, which may be attributable to congressional discord and the absence of a long-term fix to the country’s fiscal challenges.
“In our view, uncertainty will continue to weigh on economic activity in 2013,” Joshua Dennerlein, an economist with Bank of America Merrill Lynch in New York, wrote in a note.
Economists expect job creation in the manufacturing sector to remain flat in December.
The liquidation of the food manufacturer Hostess Brands in November (which happened after November’s payroll survey was conducted) may have reduced employment in December by around 15,000, according to Paul Dales of Capital Economics.
Sandy Effects Fade
The BLS said that Superstorm Sandy had no major impact on payroll employment in November, which rose by 146,000. The alternative household survey, however, suggested that the weather prevented 369,000 employees from getting to work. That number was far in excess of the 70,000 that couldn't make it to work in a normal November, Dales pointed out.
This spike in employees who couldn't make it into work suggests that there were others on short-term contracts who couldn't make it to work and consequently found themselves out of a job, at least temporarily.
“Some of those people should have returned to paid employment in December, providing a one-off boost to payrolls,” Dales said. This would fit with the immediate spike and subsequent drop back in initial jobless claims after Sandy hit.
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.
To help reduce unemployment, the Fed said it would also continue monthly purchases of $85 billion in Treasury securities and mortgage-backed securities until job market conditions improved, extending a policy announced in September.
According to the Fed’s new economic projections, most of its senior officials did not expect to reach the goal of 6.5 percent unemployment until the end of 2015.
Each January, four regional Fed bank presidents rotate into voting spots on the policy committee and four rotate out. This year’s composition is considered somewhat more dovish than what we had in 2012.
“The Fed has clearly been on the side of being willing to take more action to improve the pace of growth than a hawkish Fed would have,” Warne said. “(This year), it may be easier for him (Fed Chairman Ben Bernanke) to persuade other Fed members.”
“In terms of the Fed’s meeting in January, I think if we see 7.7 percent unemployment (in December) and another job creation number of about 150,000, it won’t change the Fed’s view one way or another,” Warne said. “It’s consistent with why they have continued to talk about the stimulus and the slow pace of job creation and the slow decline of unemployment rate over the past couple of years.”