Warm Weather Should Help December Jobs Report

By Economic IndicatorsFOXBusiness

Helped by unusually warm weather throughout much of the country, the December jobs report due out Friday is expected to be a relatively strong one, solidifying the view that the U.S. labor market will maintain its healthy momentum heading into the New Year.

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“We think December will be particularly strong given the abnormally warm weather,” economists at Bank of America Merrill Lynch wrote in a note to clients. “The average temperature in December was 40.3 degrees Fahrenheit, breaking all records for December and notably above the historical average of 33 degrees. The lack of snowstorms and favorable weather should have allowed for greater economic activity.”

The BofA economists are predicting the addition of 225,000 new jobs last month, up from 211,000 in November, and that the headline unemployment rate will hold steady at a seven-and- a-half year low of 5%.

If that prediction holds, the U.S. will have gained 2.5 million jobs in 2015, an average monthly gain of 211,000, down from 3.1 million jobs created in 2014. Combined, the two years represent the strongest back-to-back years of job creation since the late 1990s.

More importantly, perhaps, the BofA economists see wage growth also maintaining upward momentum into 2016, a situation they described as “a critical sign for a tightening labor market.” Should average hourly wages rise 0.2% in December from November as predicted, it would mean year-over-year wages rose by 2.8%, the strongest pace since March 2009.

Weak wage growth was the U.S. labor market’s fly in the ointment throughout 2015 and a primary reason the Federal Reserve waited until December to raise interest rates off their near-zero range.

Despite the strong job creation last year and a rapidly falling headline unemployment rate, wages weren’t rising accordingly. In a normal recovery, when the job market tightens, employers have to pay higher wages to attract and retain employees.

But that wasn’t the case last year; excess slack in the labor market created pools of part-time and temporary workers who would prefer to be working full-time. That surplus allowed employers to keep wages low. Now, that slack appears to be draining out of the market and wages are rising.

The Fed cited the tightening job market and their belief that it would help push wages higher in its decision last month to raise interest rates, a hugely symbolic move that marked the central bank’s departure from its interventionist policies initiated in the wake of the 2008 financial crisis.

Ultimately, the Fed is counting on higher wages to push inflation higher toward the Fed’s 2% target.

The Fed is not expected to raise rates again at its January meeting, but the December jobs report will be closely watched for signs that the economy is healing enough to absorb the higher interest rates initiated last month.

The warm December weather is expected to have benefited both the construction sector and the large U.S. services industry, especially the leisure, hospitality and retail sectors. The mining and manufacturing sectors are likely still struggling however, burdened by cheap energy prices and a strong U.S. dollar, respectively.

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