Fewer Jobs Created Than Expected, Unemployment Rises, Average Hourly Earnings Very Healthy, ISM Non-Manufacturing Better Than Estimates

- The Change in Non-farm Payrolls for December was 18K versus estimates of 70K and an upwardly revised 115K in November.

- The Unemployment Rate in December rose to 5.0% versus estimates of 4.8% and a reading of 4.7% in November.

- Average Hourly Earnings for November rose .4% versus estimates of a .3% increase and a .4% gain in November.

- ISM Non-Manufacturing for December fell to 53.9 versus estimates of 53.5 and a reading of 54.1 in November.

BOTTOM LINE: Hiring in the US slowed more than forecast in December and unemployment rose to the highest level since 2006, Bloomberg reported. Service industries, which includes banks, insurance companies and restaurants, added 93,000 workers last month. Builders reduced payrolls by 49,000 versus a 37,000 decline in November. Unemployment, while rising, is still historically low. The average unemployment rate over the last 50 years is 5.9%. Moreover, non-farm payrolls are quite volatile and a 3-month average is more appropriate to gauge the health of the job market. Non-farm payrolls have seen average gains of 97,330 over the last three months, which isn’t too bad. Average Hourly Earnings are rising at a 3.7% rate year-over-year, which is very good by historic standards. The 12-month moving average of average hourly earnings is currently rising at a 3.9% rate year-over-year. The only period during the entire 90s expansion that saw a greater increase in Americans' hourly earnings was early 98-early 99. This has helped contribute to the all-time high in Americans’ net worth that was reached again last quarter. A calming of the credit markets should lead to better economic data later this quarter. It appears to me that investors are once again pricing in the worst case scenario and are overreacting to today’s data. Fed fund futures now imply a 54.0% chance for a 50 basis point rate cut at the upcoming Fed meeting, up from 34.0% yesterday and 0% one week ago. The odds of a recession beginning this year have barely budged today, according to Intrade.com. The 10-year yield is only 3 basis points lower on today's news. Current gauges of investor angst indicate we are very close to another meaningful bottom in US stocks. I expect non-farm payrolls to rise more next month and the unemployment rate to tick slightly lower.

US service industries expanded in December slightly more than economists expected, Bloomberg reported. The new orders component of the index rose to 53.5 versus 51.1 the prior month. The Employment Component of the index rose to 53.5 from 51.1 the prior month. The Inventories component was unchanged at 50.5. The Prices Paid component fell to 72.5 from 76.5 the prior month. This gauge of the health of the largest part of the US economy is still indicating expansion. I still expect US 4Q GDP growth of around 1% and growth to average around 2% for all of this year. I expect the ISM Non-Manufacturing Index to rise next month.