Employment is like looking at the economy through the rearview mirror as companies tend to be slow to fire and hire
By Tom Buerkle
NEW YORK (Reuters Breakingviews) - At least the U.S. government shutdown doesn’t affect the Department of Labor. On Friday it reported that employers expanded payrolls at a surprisingly robust pace in December while wage growth ticked higher.
The data shows an American economy ending the year on a high note. But employment is a lagging indicator that’s unlikely to distract attention from risks on the horizon.
The 312,000 increase in nonfarm jobs was the largest in 10 months, bringing gains for the year to 2.6 million, up from 2.2 million in 2017. Hourly earnings growth edged up to a 10-year high.
Even a modest rise in unemployment contained more good news than bad because it reflected over 400,000 people entering the labour force. An economy that spurs more people to seek work can sustain growth for longer without fanning inflation, while solid wage gains should bolster consumer confidence.
The calming effect on markets — the S&P 500 gained nearly three per cent in the first 90 minutes of trading — may be short-lived. Employment is like looking at the economy through the rearview mirror because companies tend to be slow to fire and hire. Jobs were still being added two months into the great recession of 2008-09 and were still disappearing eight months after the recovery began.
Markets are forward-looking, and what they see is trouble. Corporate earnings growth is slowing as the effect of tax cuts fades. Analysts expect profit at S&P 500 companies to increase just 7.2 per cent in 2019 versus 23.6 per cent in 2018, according to Refinitiv.
Even that may be optimistic if this week’s revenue warnings from Apple and Delta Air Lines are indicative of real trouble, which could begin with a sharp slowdown in China.
U.S.-China trade talks are set to resume next week but Beijing continues to resist the fundamental policy changes that President Donald Trump is demanding. Then there’s political dysfunction. It counted as good news Friday that Federal Reserve Chairman Jerome Powell said he would not resign if pressured by Trump, but such a test could come soon.
The employment report may prod the Fed to keep raising rates even though the bond market is flashing recession warnings, with yields at 11-month lows, and Trump is dead against such hikes. Powell has that rare thing: a job nobody wants.