The economy added 157,000 jobs in December, the Labor Department said Friday in a report that fell a bit short of expectations but was good enough to close out the best year for job growth since 1999.
The moderate job growth — just about what is needed to absorb new entrants to the labor market each month — left the unemployment rate unchanged at 5.4 percent, where it has lingered for the past six months. Economists on average had forecast the report would show an increase of 175,000 jobs.
“Jobs are being created, but the pace is nothing to write home about,” said Joel Naroff of Naroff Economic Advisors in Philadelphia.
For the year, employers added about 2.2 million jobs to non-farm payrolls, the best total since the boom year of 1999, when 3.5 million jobs were created. For 2005, most analysts expect similar steady but unspectacular employment growth in an economy that is expected to slow a bit as it moves into the fourth year of expansion.
“To me this is still a dysfunctional labor market,” said Jim Glassman, senior economist at J.P. Morgan Chase. He pointed out that total employment has not yet returned to its previous peak more than three years after the expansion began.
That is extremely unusual compared with past recoveries. Even in the so-called “jobless recovery” that began in 1991, employment had surpassed its previous peak within two years.
Glassman expects the pace of employment growth to pick up in 2005 to an average of more than 200,000 a month and possible 300,000, compared with 186,000 in 2004. “We’ve had flat employment for four years running — that can’t be normal,” he said.
Ethan Harris, chief U.S. economist at Lehman Bros., said that forecast was far too optimistic. He projects job growth of about 165,000 a month in the year ahead, which he called “healthy” but far from enough to drive strong growth in wages.
Hourly wages rose by an average of 2.7 percent last year, according to Friday’s report, but consumer prices rose 3.5 percent, so “Joe Sixpack hasn’t done that well,” Harris said. Most economists assume oil prices will decline in the year ahead, allowing wage-earners to stay ahead of inflation even though employers will face little pressure to boost pay.
Most of the job gain last month came from the service sector, including education, health care and business and professional workers. The retail segment lost 20,000 workers on a seasonally adjusted basis, and manufacturing employment was roughly flat, adding 3,000 jobs. For the year, manufacturers added 76,000 jobs for the first annual gain in seven years, although the sector remains more than 3 million jobs below 1998 levels.
“We’ve got a problem if this industry does not come back,” said Glassman. “The whole Midwest has been lagging the national economy. Those states are very industrial, very dependent on this trend. It has the potential to snap back more strongly, but we’re not seeing it yet.”
Financial markets showed little reaction to the employment report, although analysts said there was nothing in the numbers to alter the prevailing view that the Federal Reserve will raise rates again Feb. 2 at the next meeting of policy-makers.
Minutes from the last meeting released this week suggest Chairman Alan Greenspan and his colleagues plan to continue raising rates slowly but steadily this year.
For the White House, which was whipsawed by erratic job creation figures during last year’s election campaign, the latest numbers were welcomed as a sign of continuing steady economic growth.
“The economy has been creating jobs since the summer of 2003, and the unemployment rate has fallen from 6.3 to 5.4 percent,” said White House chief economic adviser Greg Mankiw. “The economy is very much headed in the right direction.”
He predicted the economy would add 175,000 jobs a month in 2005.
Jared Bernstein, senior economist with the liberal Economic Policy Institute, noted that job growth last year was about 1.4 million below what historically would have been expected in the third year of a recovery.
“We’re a bit behind the curve, but the jobless recovery is solidly behind us,” he said. “It’s good to see ongoing job creation.”
The administration has had to steadily ratchet back its job-growth projections after earlier forecasts used to promote President Bush's tax-cut programs proved overoptimistic. For example the current White House projection of 2.1 million net new jobs in 2005 is much lower than a previous administration forecast of 3.6 million.
Labor force participation is trending down, reflecting “long-term structural and demographic shifts, as well as more short-term business cycle fluctuations,” said Kathleen Utgoff, commissioner of the Bureau of Labor Statistics.
The participation rate has declined sharply in the past several years among younger workers, with economists speculating that a weak labor market is causing those people to stay in school, including seeking higher degrees. But the number of people age 55 and older working or looking for employment has risen in the past four years.