December nonfarm payrolls are up 223,000 with a net downward revision of 28,000 in the prior two months. The December change is above the consensus of 200,000 in an Econoday survey. However, taking the revision into account, the number is near expectations. Private payrolls are up 220,000 in December and government jobs up 3,000. The rise in government jobs would have been larger except for a decrease in state government education of 23,800 which was in part due to a large strike of 36,000 workers affecting California's university system.

Overall, this is a robust employment report with little sign of weakening. Fed policymakers will have more evidence for the January 31-February 1 FOMC meeting that the labor market is still tight and imbalances in labor supply and demand persistent. The results lift Econoday's consensus divergence index to a very strong 43 indicating that U.S. data are substantially exceeding expectations.

Jobs in the goods producing sector are up 40,000 in December, reflecting a solid increase of 28,000 in construction, 8,000 in manufacturing, and 4,000 in mining and logging. Construction appears to continue to hire where it can find qualified workers despite the slowdown in single-family home building. Multi-family units are still being erected and homeowners are active in renovations and repairs.

Private service-providers' payrolls are up 180,000 in December. This includes gains of 78,000 in education and health services, and 67,000 in leisure and hospitality.

The average workweek is down 0.1 hour to 34.3 hours in December, a negligible decrease. Average hours are up 0.3 percent month-over-month and up 4.6 percent year-over-year. While the monthly increase in earnings is about on trend for the past five months, the year-over-year gain is losing momentum. This may be a hint that upward wage pressures are beginning to ease.

However, even with a 439,000 increase in the labor force to 164.966 million in December, labor is in short supply. The unemployment rate is down a tenth to 3.5 percent in December, below the consensus of 3.7 percent in an Econoday survey. The U-6 unemployment rate is down 2 tenths to 6.5 percent. The participation rate is up a tenth to 62.3 percent, a meager increase that shows the supply of labor remains well below pre-pandemic levels.

The number of people working part-time for economic reasons is up 190,000 to 3.878 million in December, perhaps pointing to households' need to supplement income at a time of high inflation. Employment is rising for persons on the margins of the labor force getting jobs. New entrants to the labor force are down 61,000 to 497,000 in December. Note that the Household Survey includes annual revisions back through 5 years.

A 200,000 rise is the call for nonfarm payroll growth in December versus 263,000 in November which was near the top of Econoday's consensus range. November was the seventh straight month and nine of the last ten that payroll growth exceeded Econoday's consensus. Average hourly earnings in December are expected to rise 0.4 percent on the month for a year-over-year rate of 5.0 percent; these would compare with 0.6 and 5.1 percent in November, both of which were sharply above Econoday's consensus range.

The most closely watched of all economic indicators, the employment situation is a set of monthly labor market indicators based on two separate reports: the establishment survey which tracks 650,000 worksites and offers the nonfarm payroll and average hourly earnings headlines and the household survey which interviews 60,000 households and generates the unemployment rate.

Nonfarm payrolls track the number of part-time and full-time employees in both business and government. Average hourly earnings track employee pay while the average workweek, also part of the establishment survey, tracks the number of hours worked. The report's private payroll measure excludes government workers.

The unemployment rate measures the number of unemployed as a percentage of the labor force. In order to be counted as unemployed, one must be actively looking for work. Other commonly known data from the household survey include the labor supply and discouraged workers.

If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions can be dramatic, and the information for investors is invaluable. By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline - boosting up bond and stock prices in the process.


Importance
The employment situation is the primary monthly indicator of aggregate economic activity because it encompasses all major sectors of the economy. It is comprehensive and available early in the month. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. In short, it provides clues about other economic indicators reported for the month and plays a big role in influencing financial market psychology during the month. Additionally, the Fed has made 6.5 percent unemployment a threshold for considering changes in policy - both for quantitative easing and the fed funds rate. And the Fed has emphasized that it is overall labor market conditions that matter - not just a specific number.

Interpretation
The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates. The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services in the economy. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. It is worth noting that these figures aren't adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.