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First Cut: December Employment Situation showed payroll gains highest in 10 months

On the Establishment Survey side, nonfarm payrolls jumped 312,000 in December, up from a revised 176,000 in November (previously 155,000) and 274,000 in October (previously 119,000). The net revision to the prior two months was up 58,000.

This was an exceptionally strong report, especially in light of expectations. It was driven by a surge in private payrolls at up 301,000 which in turn saw a strong month for goods-producers with gains of 38,000 in construction and 32,000 in manufacturing. Construction may have gotten a boost from recovery efforts after Hurricanes Florence and Michael where relatively mild weather in the Southeast permits building to take place at the start of winter.  Despite recent signs of a slowing in the factory sector for orders and production, hiring has not yet seen a significant change of pace, even at time of year when activity often diminishes.

The headline probably overstates underlying conditions. Nonetheless, the fourth quarter 2018 managed an average of up 254,000, a nice gain over the up 190,000 in the third quarter. The six-month moving average is at up 222,000, not materially different from the quarter. It remains to be seen if the momentum carries into early 2019, but for now the job market is in robust shape.

For the Household Survey – which included annual revisions – the U-3 unemployment rate was up two-tenths to 3.9% in December. The unrounded unemployment rate was 3.856% after 3.696%. The broader U-6 unemployment rate was unchanged at 7.6%. The rate was up do to a larger increase in the unemployed (up 276,000) than the employed (up 142,000). New entrants to the workforce (up 11,000) boosted the unemployment rate, but job leavers did as well (up 142,000).

The closely watched participation rate rose two-tenths to 63.1%, also suggesting that workers are the margins are returning to the labor market.

Federal Reserve policymakers can feel justified in the December 20 rate hike decision based on the current strength in the labor market and inflation running about on the 2% target. However, the more downbeat assessment of the outlook in the statement and Summary of Economic Projections, and recent comments by some policymakers suggest that that may be the last hike until the economic outlook is less uncertain.

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