The U.S. economy failed to launch in December, as severe winter weather contributed to the weakest pace of hiring in three years, surprising Wall Street and confirming the Federal Reserve's decision to reduce monetary stimulus deliberately.
American employers, excluding farmers, added 74,000 positions last month, a disappointing turn after a four-month stretch over which monthly payroll expansion averaged gains of 213,500, according to data released Friday by the Labor Department.
The result shocked, as lately data have tended to bring positive surprises. Earlier this week, the latest private employment reading by ADP, a provider of back-office services, suggested jobs grew in December by the most in more than a year. A closely watched poll of factory purchasing managers also indicates that hiring picked up at the end of the year. As a result, Wall Street analysts had settled on a consensus gain in payrolls of about 197,000 in December.
However, the Labor Department's monthly hiring survey has a tendency to occasionally record big drops, even during boom times – a reflection of the vagaries of trying to take the pulse of a $16-trillion (U.S.) economy with a survey of about 145,000 businesses and government agencies. Confusing matters, a separate poll of about 60,000 households showed that the unemployment rate plunged to 6.7 per cent, the lowest since October, 2008.
U.S. stocks fluctuated Friday, reflecting the mixed messages in the data, ending the trading day little changed. In reality, the U.S. economy probably isn't as weak as the payrolls reading suggests; nor is it as strong as the sharp improvement in the jobless rate implies.
Some 16,000 construction jobs disappeared in December even as other indicators show the housing market is growing, suggesting the snowstorms and unusual chill that gripped the U.S. at the December forced jobs sites to close. At the same time, the decline in the unemployment rate is exaggerated by a flight of workers from the labour force, a puzzle for economists because a growing economy should be attracting job seekers. The labour participation rate fell to 62.8 per cent in December, the lowest in almost 35 years.
"As it relates to using this data as an input in figuring out the Fed's next move, we would advise throwing the report out, as the results deviate significantly from other jobs related data," Adrian Miller, director of fixed income at GMP Securities in New York, told clients in an e-mail. Joseph Lavorgna at Deutsche Bank offered similar advice: "The outlier readings on payrolls and the unemployment rate will be discounted by monetary policy makers in light of weather conditions."
Minutes of the Fed's December policy meeting – released earlier this week after the customary three-week delay – show that "most" of the central bank's key officials favour winding up their monthly bond-buying program, albeit slowly. The Fed tapered purchases by $10-billion, to $75-billion beginning this month, the first adjustment in 15 months. Officials acknowledged that joblessness remains too high, but expressed broad confidence that the outlook was as good as it's been since the end of the recession.
The Fed's asset-purchase program, known as quantitative easing, or QE, puts downward pressure on longer-term interest rates and forces profit-seeking investors to buy riskier assets, such as equities and corporate debt, which leaves households feeling wealthier and businesses with more money to spend.
But the program also risks asset-price bubbles, and, theoretically, eventually could stoke inflation by boosting the money supply. Most economists predict the Fed will trim its bond buying by another $10-billion later this month, and then continue at that pace until the program tapers off in the fall. There still will be lots of monetary stimulus because the Fed has made clear it has little intention of lifting its benchmark lending rate from its current setting near zero until some time in 2015 at the earliest.
That pledge is complicated somewhat by the unemployment rate's rapid descent. To convince the public that borrowing costs will remain ultralow, the Fed says it won't lift its benchmark rate until the unemployment rate is well past 6.5 per cent.
With the jobless rate now on the verge of that threshold, policy makers could face difficulty anchoring expectations that money will remain super cheap for another couple of years. Expect officials to reiterate that the unemployment rate is only a guide, and that they will be watching other measures, such as payrolls and vacancies, to get a truer feel for the state of the labour market.