KEY DATA: Payrolls: +273,000; Private: 228,000; Revisions: +85,000; Unemployment Rate: 3.5% (down 0.1 point); Wages: +0.3%; Over-Year: 3.0%/ Trade Deficit: $3.3 billion narrower
IN A NUTSHELL: “A solid economy, warm weather and lots of government hiring are keeping job gains elevated, but that could change quickly if the corona virus becomes widespread.”
WHAT IT MEANS: The economy is in good shape and nothing shows that more than robust job gain we got in February. Payrolls rose much more than expected, powered by huge increases in a wide range of sectors, but many may have been weather-related. For example, construction, real estate and restaurants together added 107,000 new workers. Those gains don’t include related industries such as finance and architecture, which also hired very strongly. Undoubtedly, those increases were hyped by the unseasonably mild winter that allowed people to get out/eat out and buy homes. Other strength was seen in medical care, social assistance and, very surprisingly, manufacturing. Finally, governments are hiring like crazy but much of that may be for the census.
On the unemployment front, the rate ticked down, driven by a decline in the labor force. That happens periodically, so don’t be surprised if the rate moves back up in March. The labor market is tight, but that is not translating into strong wage gains. Hourly wages were up solidly over the month, but you would expect much more than the 3% rise over the year.
The trade deficit narrowed sharply in January. Both imports and exports fell, which is not the way you want to see the deficit decline. The large fall off in imports wasn’t due simply to declining oil prices. Indeed, the largest drop was in nonmonetary gold. Don’t ask me why. Energy and nonmonetary gold accounted for seventy percent of the import decline. There were also reductions in demand for capital goods and vehicles but increases in food and consumer products. Exports were also down, but by much less. We sold more farm product vehicles and consumer products, which was good news.
MARKETS AND FED POLICY IMPLICATIONS: That was then but this is now. The data will not likely start reflecting the impact of the coronavirus until we start get the March numbers, at the earliest. And those will likely reflect the issues we are seeing outside the U.S. The jobs and trade data are two reports that could see major virus-related impacts. For example, traffic at West Coast ports is down sharply and that should lead to continued declines in imports – a positive for growth. But as the coronavirus effects expand in the U.S., we should start seeing the effects on hiring and income. And then there is the seasonal adjustment factor to consider. If I am correct in my argument that the mild winter has hyped the payroll increases, then as we move through the spring, those gains will be backed out. And if the census hiring is boosting the government numbers, those people will start dropping off the rolls in the summer. So, when you add it up, the weather, the census and the coronavirus look like they could create some really dismal job numbers in the spring and summer. So don’t get too excited about the current condition of the economy, as the past is not likely to be prologue. Investors understand that and will be buffeted by the U.S. news on the coronavirus. The volatility is not expected to end anytime soon. And then there is the Fed. I like to say the markets are efficient but not necessarily rational but I haven’t in the past argued that the Fed decision-making has a large element of irrationality in it as well. Unfortunately, you cannot rule that out right now. After this week, who knows what they will do and when they will do it. The best guess is that once the effects of the coronavirus start hitting the economic data, and I assume they will, the Fed members will have to conclude that they need more rate cuts. Why they think that going from one percent to zero will do anything other than send the message that the sky is falling is beyond me, but as I just noted, there seems to be an element of irrationality (or panic) in the Fed’s thinking right now.