US labor market continues to improve gradually.

The December payroll survey was much as expected. The 155,000 increase in employment was roughly in line with the 153,000 average for the year 2012 overall, which in turn was the same as the 2011 average. There were few surprises in the details. Construction employment bounced back after a dip in November that was probably caused by Hurricane Sandy. Retail employment fell, but it had risen very sharply in November, suggesting that holiday hiring occurred early. There was some encouragement in a longer work-week and a solid increase in hourly earnings, which will have given a welcome boost to paychecks before they are hit in January by the expiry of the payroll tax cut. The unemployment rate held steady at a 7.8% rate.

In the payroll details, manufacturing had a strong month, adding 25,000 jobs after adding only 5,000 in November. There was a big gain in nondurables (14,000), reversing a 13,000 decline in November that was concentrated in food and chemicals. The dip in November may reflect temporary disruption from Hurricane Sandy. Durables added 11,000 jobs, with 5,000 in motor vehicles and parts. Overall manufacturing production-worker hours rose 0.4%, an encouraging sign for manufacturing output in December.

Construction employment rose 30,000, more than reversing a 10,000 drop in November. The dip and rebound probably reflect initial disruption from Sandy followed by the beginning of reconstruction work.

Private services employment growth was 109,000, slower than the 172,000 increase in November. The big swing was in retail employment, which fell 11,000 in December after rising 63,000 in November. Holiday hiring probably kicked in earlier than usual, given the early Thanksgiving and the earlier start to holiday promotions, bumping up November hiring growth at the expense of December.

Elsewhere in services, there was a notable 45,000 increase in healthcare employment, following a below-par 20,000 increase in November. Food services and drinking places added a robust 38,000 jobs after slowing to 15,000 in November. Hurricane disruption in November may account for this swing.

The government sector lost 13,000 jobs. Federal jobs fell 3,000, while state and local jobs fell 10,000, all in local education. Over the year as a whole, state and local job losses were much less severe than in 2011. A total of 26,000 government jobs were shed during 2012, compared with 230,000 in 2011.

The private workweek rose to 34.5 hours, from 34.4 hours. Total hours worked rose 0.4% for the second straight month. Hours worked in the fourth quarter rose at a 1.5% annual rate, faster than the third quarter's weak 1.0% annualized growth rate. Since our fourth-quarter GDP growth estimate is only 1.0%, that suggests a drop in productivity last quarter. Average hourly earnings were up 0.3% for the second month in a row, and are now up 2.1% year on year, above the latest CPI inflation rate of 1.8%. Overall payrolls (wages multiplied by hours) were up 0.7%, pointing to a strong increase in wages and salaries during December. That's good news ahead of the payroll tax hike, which will reduce take-home pay in January.

The unemployment rate, which comes from a different survey than the payroll figures, held steady at 7.8%. November's rate was originally 7.7%, but was raised by annual revisions to seasonal factors. The "unrounded" December unemployment rate was 7.849%; fractionally higher, and the rounded official figure would have been 7.9%. Household survey employment rose only 28,000, while the labor force increased 192,000. The employment-to-population ratio fell (from 58.7% to 58.6%), while the labor-force participation rate held steady, at 63.6%, just above its cycle low of 63.5%. The gradual improvement in employment has so far been insufficient to attract large numbers of people back into the labor force looking for jobs.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—was steady at 14.4%.

Employment growth held up well in the fourth quarter despite all the fears about the fiscal cliff. Since we are now threatened by a debt-ceiling crisis, and face a new headwind from the expiry of the payroll tax cut, it is hard to see employment growth accelerating early in 2013. But we do think that the economy's fundamentals are gradually improving, and look for faster growth later in the year to produce average monthly job gains of 170,000 for 2013.

by Nigel Gault