December Employment Report Delivers in the Details

Jan 06, 2017

The  December Employment Report missed the headline print but better wage gains and upward revisions to November’s numbers make it a decent report when all is said and done.  The mixed nature of the report has pushed Treasuries into the red as they give back some of the outsized gains from yesterday when a weaker report was perhaps expected off the mediocre ADP jobs release.  The 10-year is down 14/32nds in price to yield 2.40%. Despite the back-up this morning the yield is down 4bps since the start of the year and down 25bps since the intra-day high of 2.65% back on December 15th.


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Even with the back-up this morning, this week’s rally has taken back about half the yield back-up since the election, thus with the Trump administration just around the corner with a slew of promised tax cuts, de-regulation and fiscal stimulus, we expect further Treasury gains to be hard to come by  unless the promised plans disappoint or dissolve, and right now the market doesn’t expect either of those outcomes.


156,000 new jobs were created during the month missing the 175,000 expected gains by 19,000 but November’s initially reported gain of 178,000 was revised higher to 198,000. Two-month revisions added 19,000 jobs from previous payroll prints thus making up for the miss in today’s release.  Following in line with the headline miss, private payrolls increased by 144,000 jobs versus 170,000 expected but again November’s private sector gain of 156,000 jobs was revised higher to 198,000 jobs, a 42,000 upward adjustment.


After November’s 2/10ths drop in the unemployment rate some give back was expected and that came to pass with the rate increasing to 4.7% (4.716% to be exact vs. 4.646% in November, thus a mere 7bps increase) matching the pre-release forecast. The rate still remains near the August 2007 level, just as the housing bust was beginning to be felt in the labor market. The Household Survey (from which the various employment and unemployment rates are determined) reported an increase of 184,000 persons to the labor force split between an increase of 63,000 employed and an increase of 120,000 unemployed. The  increase in the labor force offsets the drop in November and will offset the minimal increase in the unemployment rate in the eyes of the Fed and shows discouraged workers are moving back into the labor force.


The increase in the labor force led to a small increase in the labor force participation rate to 62.7% from 62.6%. The average over the past year has been 62.8% so the participation rate seems to be stabilizing around this level after being as high as 66.4% prior to the Great Recession and as low as 62.4% after (more on this in the section below).


The U6 underemployment rate (unemployed plus part-timers seeking full-time work and those willing to work but not actively looking divided by the labor force) dropped a tenth to 9.2% as the 184K increase in the labor force and a 61K decrease in part-time workers (which acts to decrease the U6 rate) offset an increase of 120K in unemployed. Also contributing to the underemployment rate decline was a 248K decrease in marginally attached workers (not actively looking). The 9.2% rate is the lowest since April 2008 and will  add to Fed confidence that labor slack continues to be taken up. 


December’s wage and earnings numbers improved over the prior month’s disappointment with the year-over-year gain the highest since May 2009.  Monthly average hourly earnings increased 0.4% beating the 0.3% forecast and offsetting the first negative print in two years in November (-0.1%).  Year-over-year earnings rose 2.9% beating the pre-release expectation of 2.8% and easily besting the 2.5% November level.  Average weekly hours worked remained  at 34.3 hours missing the 34.4 hours expected which takes a little shine off the hourly earnings gains.  All total, these wage numbers offset the weaker November prints that seem an outlier with the December gains resuming the prior trend and something the Fed will note.


In summary, this jobs report, like the November release, was a mixed bag with a miss on the headline print and a minimal increase in the unemployment rate but solid wage gains offset those negatives along with the labor force participation rate improving.  While no one expects the Fed to increase rates at the February 1st meeting, this report will keep odds of a March hike in play. Odds of a March hike were 31% before this report and increased ever-so-slightly to 33% after. Impacting those odds from here will be how prospects for tax cuts and fiscal stimulus look to be shaping up between the Trump administration and Congress following the Trump inauguration in two weeks.


Treasury prices are lower across the curve offsetting some the rally yesterday that expected a weaker report. The short-end is down 2/32nds in price with the 2-year note yielding 1.20% after being as low as 1.16% yesterday.  Meanwhile, the long-end is also down with the 10-year off 14/32nds in price to yield at 2.40%.




Implied Fed Funds Target Rate Labor Force Participation Rate


Much has been made of the declining Labor Force Participation Rate throughout the recovery from the Great Recession. The graph takes a longer-term look at the rate and finds the decline has been a secular and not a cyclical event. The peak rate was 67.3% hit  in March 2000 with a gradual but steady decline that accelerated out of the recession continuing to a cyclical low of 62.4% in September 2015.  As Baby Boomers retire in increasing numbers in coming years and leave the labor force the Fed will probably declare victory if the rate can just stabilize around its current level.


Labor Force Participation Rate



Market Rates Market Rates


Market Rates



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