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Why this 'disappointing' jobs report will soon look good

  • December's disappointing employment gain of 148,000 was well below expectations.
  • That number will likely be revised upward, but jobs growth is destined to fall even lower by mid-year.
  • Here are the factors that will curtail growth and cause big problems for companies.
Carlo Allegri | Reuters

It happens. Every so often the Bureau of Labor Statistics reports an aberrant jobs number. This appears to be one of those months. December's disappointing employment gain of 148,000 was well below expectations and inconsistent with every other statistic on the strength of the job market and broader economy during the month.

Historically, these kind of surprises are often revised away as the BLS collects more responses from businesses that participate in their survey. Particularly in months like December that are notoriously tricky given the vagaries of the weather and measurement issues around Christmas hiring. Indeed, brick-and-mortar retailers continued to lay-off workers last month, and while that's not a surprise, employment at delivery services which is driven by booming online retailing, showed a surprisingly small gain.

Abstracting from the monthly vagaries of the data like these, underlying job growth remains closer to 175,000 jobs per month. And it is likely to shift higher, at least through this summer, as the impact of deficit financed tax cuts filter through. The fiscal stimulus should provide a temporary boost to growth and jobs, adding an estimated 300,000 job in 2018, and ensuring this year will be another year of 2-million plus job growth.

At this pace of job growth, unemployment, which held steady last month at a low 4.1 percent, will continue to decline. Sub-4 percent unemployment seems likely by the spring and mid-3 percent unemployment is very possible by this time next year. The last time the job market was this tight was only for a few months at the very end of the technology bubble around Y2K. Then you have to go back to a brief period in the 1960s and then the early 1950s during the height of the Korean War when millions of men had been drafted into the military.

"After the temporary boost from the deficit-financed tax cuts fade later this year, job growth is destined to slow sharply."

Businesses number one problem is thus quickly becoming the lack of qualified workers. There are already a record 6 million open job positions, and not just in computer programming but across nearly every industry and occupation. Retention is also a mounting issue for businesses. The percentage of the workforce that quit their jobs last month fell back a bit, but it remains very high, and close to record highs after adjusting for the fact that the workforce is growing older and less mobile.

The Trump administration's immigration policies will only add to these problems. Immigrants currently account for most of the growth in the nation's labor force, as the large baby boom generation is retiring en masse. More millennials are starting to work, but they are being more than offset by the retiring boomers.

Even if immigrants continued to come into the country to work at the same rate as they did during the Bush and Obama administrations, the labor force would soon come to a virtual standstill. With the pullback in immigration now underway by the Trump administration, that seems likely to happen. The agriculture, construction, leisure and hospitality, retail and transportation industries will have an especially tough time finding workers.

Hopes that lots of prime-aged workers sidelined since the Great Recession will re-enter the workforce to take these open job positions, will likely be frustrated. Some are coming back, but certainly not in the numbers necessary to forestall further declines in unemployment and the looming specter of significant labor shortages. The problems many of these workers face in getting back to work are very difficult to overcome, including opioids, incarceration and disability.

This brings us back to the December jobs report. While the disappointing job gain during the month is likely a statistical fluke and will eventually be revised higher, it does highlight an important point. Namely that after the temporary boost from the deficit-financed tax cuts fade later this year, job growth is destined to slow sharply.

With no more unemployed or underemployed to hire, fewer immigrants coming into the country to work, and the boomers retiring, job growth will significantly throttle back. By early in the next decade, months in which job growth comes anywhere near December's 148,000 gain will be the fluke.

Commentary by Mark M. Zandi, chief economist at Moody Analytics, a subsidiary of Moody's Corp., and a leading provider of economic research, data and analytical tools. Zandi is also a co-founder of Economy.com, which Moody's purchased in 2005. Follow him on Twitter @economics_MA.

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