A 2020 Forecast Upgrade Despite December Payroll Miss
U.S. nonfarm payrolls increased by only 145k jobs in December, a slight undershoot from the consensus forecast of 160k and our own forecast of 170k. This is a sharp deterioration from November’s 256k job gain.
More disappointing news comes from average hourly earnings, which managed to increase by only 0.1% in December with a lean 2.9% gain from a year ago.
The worst annual reading on this wage growth measure since July 2018. Average weekly hours was also a little less than expected at 34.3 hours versus forecasts of 34.4 hours and October and November was revised down to 34.3 hours too.
This suggests slower real personal income growth in Q4 which will make it harder for consumers to keep spending at their 2019 pace in 2020.
Looking at the December job gains by sector, we see a broad-based job creation slowdown pattern across industries, but no major job declines, except for manufacturing and mining that lost 14k jobs and 9k jobs on net last month. Service sector job creation slowed to 140k jobs in December from a 191k increase in November.
Business services created only 10k job in December about a fifth of what the industry created in November. The gains in education and health care (+36k) and government payrolls (+10k) were about half as large as in November too. Job growth in finance and information services was downright anemic in December at just +6k and +3k respectively. In contrast, job creation in retail trade surged by 41k jobs. Leisure and hospitality added a healthy 40k jobs, and construction payrolls accelerated to a 20k job gain last month.
The silver lining here is that a job and income growth slowdown has already been incorporated into our 2020 economic outlook, so while the December jobs and income data was somewhat worse than we forecast, the 2020 outlook for a U.S. GDP growth slowdown, but no recession, remains intact. On a three month average basis nonfarm payroll growth remain at a robust 184k jobs, so there is no need for the Fed or markets to panic about just one bad month.
In fact, we are revising our 2020 GDP growth outlook higher today, largely removing the sharp slowdown we had in our baseline forecast for the second half of this year. The substantial easing of U.S. and global monetary policy in 2019 and the easing of trade tensions appears to already be putting a floor under business and consumer confidence enough to remove the worst case tail-risks for 2020.
We now expect U.S. GDP growth of 1.8% year/year in 2020 down from a 2.4% pace in 2019. This is a more gradual U.S. growth slowdown that what we had in our forecast for the last six months. Even in the second half of 2020, U.S. GDP growth should remain above 1.0% on an annualized basis. This means only a modest increase in the U.S. unemployment rate in 2020 to an average 3.8% from 3.7% in 2019.
Implications for the Fed and interest rate outlook for 2020 are fairly straight forward. The Fed will be able to remain on hold longer than previously forecast. We only expect one quarter point rate cut from the Fed, coming in December after the November election. This means the 10-year Treasury rate should remain much closer to current levels rather than dropping back to the September lows of 1.45% or plunging to 1.00%.
Supporting this forecast, there has been a substantial 30 basis point increase in longer-term bond market inflation expectations over the past month, even as real interest rates have dropped by about 10 basis points.
Should conflict in the Middle East intensify in the months ahead, we think the implications will be higher energy prices and inflation in the U.S. near-term, rather than a sharp pull-back in U.S. economic growth. The risk of a stagflationary environment in the U.S. is a new emerging risk to our outlook for 2020.
To learn more, check out this week’s U.S. Outlook Report.