December Employment Report Suggests Above-Trend GDP Growth in Q416

The December Employment Report is consistent with above-trend GDP Growth in Q416, even though Payrolls slowed from an upward-revised November, the Unemployment Rate ticked up, and the wage data overstated inflation risks.  All told, there is little in the Report that is different from the consensus view of the economy, and it should not change expectations of gradual Fed tightening in 2017 -- subject to how fiscal policy shapes up.

The strongest evidence of above-trend growth comes from the Unemployment Rate.   Although it ticked up to 4.7% from 4.6% in November, the Rate remained significantly below the 4.9% Q316 average. 

The trends in the Report's other measures of overall economic activity were mixed in Q416, but none undermines the idea of above-trend growth in Q416..  The trend in Payroll Growth slowed, with the 3-month average of the m/m change falling to +165k in Q416 from +212k in Q316.  The Q416 average is below the +188k average for the full year.  But, the relationship between GDP Growth and Payrolls is not one-for-one, so the slowdown in job growth is more suggestive than conclusive.  Indeed, Total Hours Worked rose at the same pace in Q416 as in Q316 -- both up 1.3% (q/q, saar). 

                                   3-Month Average                                     Real GDP Growth
                                  of M/M Change in Payrolls (000s)         (q/q % change, saar)
                      Q416       165                                                                 na         
                      Q3           212                                                                3.5
                      Q2           146                                                                1.4
                      Q1           196                                                                0.8

While wage inflation jumped in December, it was largely a bounce-back from the very weak November -- +0.4% m/m versus -0.1% in November.  Calendar quirks were likely responsible for the volatility.  The same calendar configuration should serve to hold down the m/m and y/y increase in January.   AHE should slow to +0.2% m/m in January, and its y/y should fall to 2.6% from 2.9%.