The economy added to the ranks of the employed again in December, as nonfarm payrolls rose by 155,000 during the month. With the November number also adjusted higher by 14,000, the overall result exceeded expectations by about 20,000. The unemployment rate technically remained unchanged at 7.8% (as the November rate was revised upward from 7.7%) to end the year lower by 0.7% compared to December 2011.
Clearly, companies were able to look past their stated concerns about the fiscal cliff heading into year end, adding to payrolls despite the uncertainty about near-term fiscal policy and the potential negative impact on the U.S. economy.
Rosier prospects for employment could help to reverse a portion of the steep dip in consumer confidence last month, although many households face a negative surprise in their paychecks in the months ahead.
While policymakers recently reached a deal to preserve current income tax rates for most taxpayers, the increase in marginal rates for high income earners could have a disproportionately negative effect. Those high income earners also in general tend to be high spenders, and will almost certainly be trimming their spending in response.
More notably, the increase in payroll taxes from 4.2% to 6.2% means that the overwhelming majority of households will see a drop in their take home pay. That result is also likely to prompt consumers to tighten their belts, although the degree to which they dip into savings could soften the blow.
All in, recent economic data continues to suggest that the economy is still moving forward. Higher taxes will crimp discretionary income in the months ahead though, creating a risk to consumers. While the full impact of the fiscal cliff was avoided, there is still likely to be a drag on the economy, the degree of which remains to be seen.
To see news coverage featuring Jim’s comments, please visit the following site: