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December's stronger-than-expected jobs report shows the labor market remains solid, but does not alleviate fears that the economy is slowing down as the new year begins.
The economy added 312,000 jobs in December, far more than the 177,000 that were expected and the largest increase in payrolls since February. The unemployment rate rose to 3.9 percent, from 3.7 percent, but it was viewed positively since 419,000 new workers joined the workforce, boosting the participation rate to 63.1 percent, up 0.2 percentage points.
"It's hard to be very forward looking on it. It should give some relief that the labor market had some very good momentum heading into the market turmoil," said John Briggs, head of strategy at NatWest Markets. Briggs added that the growth worries are more about the world economy and are starting to creep into the U.S. outlook.
The jobs report follows Thursday's December ISM manufacturing report, which showed the biggest monthly slide in manufacturing activity since the financial crisis. The 54.1 reading still signaled economic expansion at a solid pace, but the skid was worrisome because of a significant drop in new orders within the report.
"Is this old news that's about to change or was ISM catching up with other stuff and we're ratcheting growth lower to 2, 2.5 percent as opposed to 3 percent?" said Briggs. "The job market tends to lag. The ISM is more forward looking. That's why it's difficult to say this number should sway it one way or the other."
Economists expect the economy to slow down a pace of growth just above 2 percent in the first half and slightly lower in the second half. The fourth quarter was growing in the high 2s to 3 percent range.
As for the Fed, economists see little takeaway for the Federal Reserve's next rate decision from the jobs number.
"The Fed, they have a dual mandate. The labor market continues to head in the direction they want, but we are also in I think a temporary stage, but it's still a stage, where inflation is decelerating and below target," said Ward McCarthy, chief financial economist at Jefferies. "They are telling us they want to slow down on their rate hikes, and they will slow down. ... The next rate hike isn't going to happen until inflation picks up again."
Stocks futures briefly came off their highs as some traders initially looked at the strong jobs number as a potential lever for the Fed to raise rates. Treasury yields, already higher on the day, moved to session highs, with the 2-year at 2.44 percent. The dollar index erased its losses and was up 0.2 percent.
Normally, the market would have honed in on the jump in wages, up 0.4 percent, slightly higher than expected. But other inflation-related data and the sharp drop in oil prices have dimmed expectations for much of a move up in price measures. The PCE inflation index, watched by the Fed, was up 1.9 percent in November, but still below the Fed's 2 percent target.
"This is a very healthy number. There's a lot to like. The rise in the unemployment rate is troubling at first blush but then you see the participation rate up. People are flooding back into the labor market and that's a good thing," said McCarthy.
The report also included a revision to November, with nonfarm payrolls rising to 176,000, from 155,000. Manufacturing added 32,000 jobs, and construction rose by 38,000. Health care jobs increased by 50,000.
"There was a big jump in education and health, the biggest month of hiring since since 2013, and manufacturing had its best month since December 2017," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "Looking at it as a whole, it's great, but I don't think anyone should take that and extrapolate this to what hiring intentions will be in 2019 because it's clear that economic conditions have changed."