5 Takeaways from the Job Report - WSJ.com

Wall Street Journal

U.S. Adds 74,000 Jobs as Hiring Slows Sharply

Unemployment Falls to 6.7% Because of People Leaving Workforce

By Jonathan House

Updated Jan. 10, 2014 10:56 a.m. ET

The U.S. job gap created during the most recent recession remains, and while payrolls are being added to the economy, they haven't kept pace with population growth.

WASHINGTON—U.S. job growth slowed sharply in December amid unusually cold weather, closing out the year on a weak note and potentially dousing the Federal Reserve's enthusiasm about the recovery as it winds down its bond-buying program.

U.S. payrolls rose by 74,000 last month, the smallest monthly gain in three years, the Labor Department said Friday. The figure marked a sudden pullback from growth of 200,000 or more in the prior two months.

The Labor Department said the unemployment rate fell to 6.7% from 7%, though the decline was largely the result of people leaving the workforce. Economists had expected a gain of 200,000 jobs and a 7.0% jobless rate, according to a Dow Jones Newswires survey.

The Labor Department data included signs that the hiring slowdown was at least partly due to colder-than-usual weather last month, a factor that suggests the December reading isn't necessarily the beginning of new downward trend.

The jobs report showed a 16,000 decline in December construction payrolls, reversing most of the prior month's gain and ending a six-month string of gains. The sector is particularly sensitive to weather conditions.

The number of people not reporting to work because of weather conditions was 273,000 in December, according to the survey of households. That was higher than the average of 179,000 for the past 10 Decembers and the highest for that month since 1977.

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Morgan Stanley economist Ted Wieseman, using the Labor Department figures, estimated that colder weather restrained payroll growth by 50,000 by 75,000 jobs. "Weather was an important contributor to the softness in December payroll job growth but not enough to explain all of the softness," he said in a note to clients.

The latest jobs data could give some Fed officials pause as they meet at the end of the month to consider further cuts to their bond-buying program, which is designed to keep interest rates low and boost the economy. Fed officials decided last month to reduce the pace of monthly purchases by $10 billion this month to $75 billion. They have signaled plans to reduce the pace by $10 billion increments at subsequent meetings, provided the recovery in the job market and overall economy remains on track.

"The Federal Reserve's justification for tapering its asset purchases—that recent labor market progress was sustainable—appeared to be tested today," said Paul Edelstein, economist at IHS Global Insight.

Weakness in December's report was broad-based, extending beyond weather-sensitive sectors. Government payrolls declined by 13,000 in December. The health-care sector, a steady growth driver for much of the year, declined by 1,000.

One bright spot: Retail employment rose by over 55,000, though the strength highlighted that the jobs recovery has been largely skewed toward lower-paying industries. Average hourly earnings rose 1.8% in December from a year earlier, down from a 2% gain in November.

More than four years into the economic recovery, the job market's healing process remains far from complete. The unemployment rate remains near levels previously seen only during recessions. The share of Americans who are either working or looking for work fell to 62.8% in December, returning to the 35-year low it touched in October.

A broader measure of unemployment that includes people working part time who want full-time jobs and people who have who are marginally attached to the labor force stood at 13.1% in December, unchanged from November.

Monthly payroll numbers can be volatile and subject to large revisions. The numbers for October and November payroll numbers were revised up by a combined 38,000, bringing the average gain over the last three months to about 172,000.

That represents a small rise from a 167,000 monthly average between July and September. For all of 2013, the average pace of monthly gains reached 182,000, down slightly from 183,000 in 2012.

The December employment report showed a labor market struggling to accelerate despite other evidence of an increasingly broad-based recovery. Recent data on housing, manufacturing and consumer spending have shown mounting strength.

Better-than-expected trade figures earlier this week led many economists to sharply raise their forecasts for economic growth in the final three months of the year. Macroeconomic Advisers boosted its fourth-quarter projection to 3.5% from 2.6%. Fourth-quarter growth at that pace, following a 4.1% annualized increase in the third quarter, would mark the fastest half-year growth stretch since the fourth quarter of 2011 and the first quarter of 2012.

Write to Jonathan House at jonathan.house@wsj.com and Sarah Portlock at sarah.portlock@wsj.com

Updated Jan. 11, 2014 12:13 a.m. ET

U.S. businesses added 74,000 jobs in December, well below the 200,000 that were forecast. The details also look weak, but the good news is that some of the drag looks temporary and January job growth should bounce back. What can be gleaned from Friday's report:

1. Blame Mother Nature

Construction—one of the industries most affected by weather—reported a loss of 16,000 jobs, the first drop since June and the biggest decline since May 2012.

2. Less of the population is working or looking for work

The unexpected drop in the December jobless rate to 6.7%—the lowest since October 2008—reflects a decline in the number of unemployed. Where did those people go? Less than one-third found work; the rest dropped out of the labor force.

3. Health-care hiring takes a sick day

The health-care sector cut 6,000 positions in December. That's the first seasonally adjusted drop since the Labor Department started tracking this sector in 1990, and reflects a sharp slowdown in the unadjusted number of hires—only 1,800 jobs added last month, compared with a 27,000 average in the previous five Decembers. Much like the weather effect, however, the slowdown is probably a one-off event and hiring should rebound in January.

4. Look for a small December income gain

The weak payroll number was accompanied by a shorter work week and little change in hourly pay. The workweek fell six minutes to 34.4 hours in December. Hourly pay for all employees increased only 2 cents, or 0.1%, to $24.17, less than the 0.2% gain forecast. That combination suggests wages and salaries hardly grew last month.

5. Jobless rate creates a problem for Fed officials

The central bank has said it wouldn't consider raising short-term interest rates until unemployment reaches the 6.5% threshold; now, it's just 0.2 percentage point away. Fed officials know the decline isn't all because of a healthy labor market, and they don't want to start tightening credit too quickly after the jobless rate gets to 6.5%.

—Kathleen Madigan