KEY DATA: Payrolls: +227,000; Unemployment Rate: 4.8% (up 0.1 percentage point); Wages: +0.1%/ ISM (NonMan.): -0.1point; Employment: +2 points
IN A NUTSHELL: “The labor market is still a solid job machine but workers are not seeing wages grow solidly.”
WHAT IT MEANS: The jobs machine keeps on humming along. The nation’s businesses added jobs at a very strong pace in January and the gains were spread across most of the economy. Construction workers were hired like crazy, manufacturers added to their payrolls, retailers kept expanding (or maybe they just haven’t shut the stores yet), finance and real estate companies grew, firms started hiring temps again and the health care and hospitality sectors continued to demand more workers like crazy. Only the government showed restraint. But there are some warnings in the numbers. The acceleration in job gains from December’s moderate 157,000 increase came largely from two places: Construction and temporary employment services. Weather probably played a major role in the construction swing (it was warm in January), while the decline in temp positions was likely an aberration, making for an outsized rise in January. Don’t be surprised if job gains retreat back to the 150,000 to 175,000 going forward.
The unemployment rate inched upward in January as the labor force surged, lifting the participation rate as well. All this angst about the falling participation rate is simply misplaced. The rate has been in a fairly tight range for over three years, as the demographic forces driving it down are being offset by the expected return of frustrated workers. Still, there doesn’t seem to be enough pressure on companies to bid more for workers. Wages rose minimally over the month and are up only 2.5% over the year – before inflation is factored in. That is just not good enough.
The Institute for Supply Management reported that the Non-Manufacturing sector continued to expand solidly in January. The overall index was off minimally and the details were solid. Most importantly, hiring is picking up, as order books are no longer thinning. Order growth is still strong, though a touch less than it had been, largely due to weakening in export demand.
MARKETS AND FED POLICY IMPLICATIONS: Boy, what a difference eight years make. When Barack Obama became president in January 2009, the economy lost 793,000 jobs. The swing between then and now was over one million positions. The tasks facing the two of them are totally different. Eight years ago, it was stop the bleeding. Today, it is keep things going so wages can rise faster. Tax cuts, regulatory changes and infrastructure spending increases all could help, but they are not likely to significantly affect the economy until well into the second half of the year. That makes the Fed’s calculus more difficult. The unemployment rate is pretty much at its target and the inflation target is within sight. That seems to argue for a near-term rate hike. But Fed Chair Yellen has indicated she would be willing to let the economy run hot for a while and the modest wage gains provide her with some cover to do so. That said, monetary policy works with a lag and if the Trump fiscal policies are implemented, the Fed cannot fall too far behind the curve or it will have to raise rates faster than anyone would like. This increases uncertainty about the course of Fed policy. As for the equity markets, solid job gains and low wage pressures seem to be the recipe for a renewal of the exuberance we have seen since the election. How long that will last is anyone’s guess.