US employers maintained a solid pace of hiring in December while raising wages, putting the economy on a path to stronger growth and further interest rate increases from the Federal Reserve this year.
Nonfarm payrolls increased by an estimated 178,000 jobs last month after a similar rise in November, according to a Reuters survey of economists. The unemployment rate is forecast ticking up to 4.7 per cent from a nine-year low of 4.6 per cent in November.
Average hourly earnings are expected to rebound with a 0.3 per cent rise, benefiting from a calendar quirk, after dipping 0.1 per cent in November. That would push the year-on-year increase to 2.8 per cent from 2.5 per cent in November.
The Labor Department’s closely watched employment report added to data ranging from housing to manufacturing and auto sales in suggesting that President-elect Donald Trump is inheriting a strong economy from the Obama administration.
“It showed the economy finished 2016 on a strong note with buoyant activity,” said Thomas Costerg, a US economist at Standard Chartered Bank in New York. “It’s a stronger starting point for the Trump administration. There is prevailing optimism across the economy which bodes well for 2017.”
Trump, who takes over from President Barack Obama on January 20, has pledged to increase spending on the country’s aging infrastructure, cut taxes and relax regulations. These measures are expected to boost growth this year.
But the proposed expansionary fiscal policy stance could increase the budget deficit. That, together with faster economic growth and a labour market that is expected to hit full employment this year, could raise concerns about the Fed falling behind the curve on interest rate increases.
The US central bank raised its benchmark overnight interest rate last month by 25 basis points to a range of 0.50 per cent to 0.75 per cent. The Fed forecast three rate hikes this year.
“With the spectre of a fiscal stimulus lifting growth and inflation further, there is a risk that the Fed will have to raise interest rates at a faster pace,” said Harm Bandholz, chief US economist at UniCredit Research in New York.
First-time applications for unemployment benefits increased between the November and December survey periods, with some economists attributing the rise to cold weather. Also arguing for a slowdown in job growth, service industry employment fell sharply in December from a 13-month high the prior month.
Still, any payrolls print above 100,000 would be considered enough to absorb new entrants into the labour market. Fed chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with growth in the work-age population.
Employment growth in the first 11 months of 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015. The slowdown in job growth is consistent with a labour market that is near full employment.
There has been an increase in employers saying they cannot fill vacant positions because they cannot find qualified workers. The skills shortage has been prominent in the construction industry.
“The labour market is tight. Indeed, maybe the biggest complaint that firms have is their ability to find qualified workers,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
“If that is the case, then hiring will be limited and may actually slow going forward. The option is for wages to rise.”
Even as the labour market tightens, there still remains some slack, which is holding back wage growth. The labour force participation rate, or the share of working-age Americans who are employed or at least looking for a job, remains near multi-decade lows. Some of the decline reflects demographic changes.