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Economic Insights

Recent data on job growth indicate a solid pace of economic activity in the United States.


In Brief

  • A “blowout” U.S. employment report for December 2018, showing much larger than expected job growth, augurs well for the U.S. economy as it enters 2019.
  • While wage growth was also strong, current trends in productivity suggest that higher worker compensation won’t necessarily add pressure to U.S. inflation.
  • We believe these factors could be positive for asset prices, though investors will have to keep an eye on the potential for adverse developments in trade and U.S. retail prices.


Much of the market volatility of late 2018 was driven by concerns that U.S. economic growth would begin to soften in 2019. But as the New Year begins, some key data are signaling continued strength. On January 4, 2019, the December U.S. employment report released by the U.S. Bureau of Labor Statistics (BLS) showed much larger than expected job growth for the month, with nonfarm payrolls rising by 312,000. Including upward revisions to data for October and November 2018, this was a “blowout” report from a job creation standpoint.

Employment gains were very large in two industries—manufacturing and construction—whose vulnerabilities to monetary tightening and adverse trade policy are above average. Since employment is fully coincident with economic activity, the large gains in the fourth quarter of 2018 belie recent data suggesting weak U.S. output growth. This should help calm some of the recent market hysteria about the potential for excessive tightening by the U.S. Federal Reserve (Fed) and slowing growth in China.

December’s strong job gains were accompanied by rising wages. The BLS reported that average hourly earnings rose 0.4% for the month, and 3.2% year-over-year, versus economists’ forecasts (as compiled by Dow Jones) of 0.2% and 3.0%, respectively. If the gains hold into January, it will confirm that hourly earnings are picking up in response to a tight labor market—and that the quality of available jobs is improving. Both of these are positive for consumer confidence and consumer spending, and for the durability of the current recovery into 2019 and beyond.


Chart 1. U.S. Wage Growth Is Picking Up. Will Inflation Follow?
Average hourly earnings (monthly), March 2007–December 2018

Source: U.S. Bureau of Labor Statistics.


Wage gains are also potentially inflationary and damaging to margins. However, this is only true if productivity fails to accelerate. There have been some hints of this recently and the data from the household survey portion of the December jobs report also suggest that potential output could be greater than previously believed, which means that the economy retains excess capacity to grow into without triggering a structural acceleration in inflation.

The BLS data also showed that the unemployment rate rose from 3.7% in November to 3.9% in December and the U-6 unemployment rate (which includes individuals available to work who haven’t actively sought employment recently) remained at 7.6%. The rise in unemployment was driven by increasing labor force participation, that is, more workers entering the labor force but unable to secure employment immediately. Increasing labor force participation helps improve labor mobility, a positive for productivity growth, albeit a very modest one.

More significant for productivity, 3% U.S. GDP growth over the past year has only been accompanied by a 0.3%-0.4% decline in the unemployment rate. That’s much smaller than usual and much less than in earlier years of the current expansion. This, again, suggests that we could be having an unusual late-cycle acceleration in productivity.

Investment Implications
We believe that a ramp-up in productivity would be an unambiguous positive for asset prices, since it would allow companies to maintain high margins for much longer than usual and also permit the Fed to delay tightening since wage gains would be less inflationary. Indeed, given the current strong pace of economic activity, as indicated by labor market activity, and the potential for improvements in productivity, we believe investors may have trouble finding any “clear and present dangers” at the macro level.

Of course, there are a couple of caveats. For one, a potential negative outcome in the current U.S.-China trade talks could throw everything off track and prolong the current period of elevated uncertainty. That will only happen if the United States decides it’s the right time to engage China in a prolonged strategic conflict, accepting the negative consequences for growth and asset prices that this decision would entail. The Chinese side appears willing to make a deal that could be portrayed as a great victory for the U.S. side, especially compared to the modest concessions gained from Mexico and Canada in last year’s NAFTA negotiations.

Another potential negative is the possibility of higher-than-expected inflation over the next couple of months as a very strong U.S. holiday selling season leads to less discounting than usual by retailers. This could increase concerns about the Fed remaining too aggressive, but we think that’s a more manageable risk, assuming the Fed agrees that the potential upside surprises in December and January do not represent a permanent acceleration in underlying inflation. Inasmuch as inflation expectations have moved sharply lower recently, we think the Fed is more likely to forecast lower inflation, so a couple of bad months around the turn of the year shouldn’t provoke undue hawkishness. That could leave the strong growth/low inflation dynamic of recent years in place a while longer, to investors’ great relief. 



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