What the Latest NFP Report Means for the U.S. Economy

Newsflash! The U.S. economy boasted of yet another month of impressive employment gains, as the latest NFP report beat expectations. Analysts expected to see a 241,000 rise in hiring but were positively surprised to see a 252,000 increase for December and an upward revision from 321,000 to 353,000 for the November NFP reading.

With that, the U.S. unemployment rate improved from 5.8% to 5.6% as the economy saw its strongest quarterly pace growth in nearly a decade. To top it off, Uncle Sam marked 2014 as its best year of hiring gains since 1999.

A closer look at the components of the report shows a lot of green shoots, as the U.S. Labor Department’s diffusion index indicated that progress was made across most economic sectors. In particular, the construction industry chalked up the strongest increase in employment while factories, health care providers, and business services carried on with their consistent hiring trends.

However, not all was fine and dandy as the headline numbers suggest. In fact, the labor force participation rate declined once more, indicating a rising number of Americans not actively seeking employment. The participation rate tumbled to 62.7%, its lowest reading in 38 years, with 451,000 working-age Americans giving up looking for work in December.

Apart from that, wage growth was non-existent, as average hourly earnings showed a 0.2% decline for December. It didn’t help that the 0.4% increase in wages initially reported for November was slashed in half to just 0.2%.

Some analysts believe that the latest report suggests that the U.S. labor market has already reached a peak and may soon show a bit of weakness, particularly in the oil industry. For now, the slump in oil prices doesn’t appear to have made a dent in employment, although hiring gains in the sector have been slowing down recently.

With that, forex market participants are careful to assume that the stronger than expected December NFP release is a point in favor of Fed tightening this year. No wonder the U.S. dollar wasn’t able to benefit from the release, as it edged lower to most of its major forex counterparts, especially the Japanese yen.