December Labor Gains: Broad-Based and 2013′s Best

U.S. employers added 238,000 new positions to payrolls last month, making December both the fifth month of solid job creation and the strongest month of employment gains in 2013, according to the employment report prepared by payroll processor ADP. The U.S. economy added an average of 204,000 jobs from August through November, an increase from the 159,000 per month added between April and July, and the growth suggested the labor market had taken giant steps toward a recovery.

With monthly employment growth now averaging 200,000 jobs for several consecutive months, “job growth [has] meaningfully accelerated,” stated Moody’s Analytics chief economist Mark Zandi, whose firm helps compile payroll processor ADP’s National Employment Report.

Screen Shot 2014-01-08 at 7.30.32 AM

To Zandi, the acceleration of job growth means that businesses are becoming “more confident and increasing their hiring,” which represents a significant change in attitude from earlier in the year. For much of 2013, the slow decline of the weekly initial applications for unemployment benefits and decreasing layoffs were the only sources of strength in labor market. The decrease of jobless claims suggested that while the job market was resilient, despite the less-than-rosy growth of the U.S. economy, employers were far too worried about that slow growth and the weak spending of American consumers to boost hiring. In a typical recovery, falling jobless claims are accompanied by an expansion of hiring, but for much of last year, the job creation part of the recovery equation was missing.

Now, it seems that the recovery of the labor market is gaining momentum, which bodes well for the economy. Job growth and consumer spending have a close relationship, which can be described as a “chicken and the egg” connection. Businesses do not want to spend money unless they are sure consumers will spending money on the goods and services they produce. Yet, as long as consumers are worried about their job prospects, they are more inclined to save more and spend less, and indeed, a recent Gallup poll found that, “Since the 2008 financial crisis, the majority of Americans have said they prefer saving money to spending it.” Therefore, faster job growth combined with greater increases in wages will spur stronger consumer spending, and a healthier American consumer means a healthier U.S. economy, as consumer spending accounts for approximately 70 percent of the country’s gross domestic product.

Economists from Bank of America have attributed the acceleration of consumer spending and the improvement in consumer sentiment to “better labor market conditions.” However, better labor market conditions still rely on strong employment gains in manufacturing, retail, and construction, the economists noted in a recent research note seen by Bloomberg.

“The job market ended 2013 on a high note,” said Zandi in the ADP report. Beyond the strong job creation number, the firm’s employment data contained several other positive indicators for the labor market. As the Moody’s economist noted, the job gains were “broad-based” across the United States’ industries. Showing notable strength were the construction and manufacturing sectors, which added 48,000 new positions and 19,000 new jobs, respectively. While it was the best month on record for the construction sector since 2006, manufacturing job growth did slow slightly. Businesses offering professional or business services added the greatest number of new workers to payrolls, with 53,000. Financial services firms added 10,000 jobs and the trade, transportation, and utilities sector added 47,000.

December’s job gains were led by small companies. Small companies — employing between 1 and 49 workers — added 108,000 positions to their payrolls last month. Comparatively, medium businesses, with 50 to 499 employees, added 49,000 jobs — and large corporations, with 500 or more workers, added 71,000. In terms of sector job additions, unsurprising, the service-providing industries created the most jobs, with 170,000 payroll additions, while the goods-producing industries added a more modest 69,000 new positions, which was a strong gain than November’s 40,000 additions. Through 2013, the goods-producing industries created 286,000 jobs, of which nearly 75 percent came from a construction sector benefiting from the surging housing market.

To ADP president and chief executive officer Carlos Rodriguez the fact that growth of United States private sector employment in December surpassed November’s gains is “encouraging news that hopefully bodes well for 2014.” The first sign that job growth was picking up came in the Department of Labor’s October Employment Situation Report, even though the numbers contained in ADP’s National Employment Report that month did not bode well for the more authoritative jobs report from the Department of Labor. However, the October numbers defied expectations. The report revealed that total nonfarm payroll employment rose by 200,000, an indication that the 16-day shutdown of the federal government did not prevent employers from adding positions to their payrolls at a more robust pace than expected.

When it is released Friday, economists expect December’s Employment Situation report to show employers added a more-modest 191,000 new positions to their payrolls last month, while the unemployment rate is expected to remain unchanged at 7 percent. Of course, a significant miss of economists’ expectations could change the Federal Reserve’s plans to taper the central bank’s month stimulus program of $85 billion in asset purchases. But the ADP report suggests that the Labor Department’s number will be equal to or above the expected job gain.

Follow Meghan on Twitter @MFoley_WSCS