February Employment Report
Economics in a nutshell: “When the job market and the GDP numbers diverge, go with the employment numbers.”
INDICATOR: February Employment Report
KEY DATA: Payrolls: +242,000; Private Sector: +230,000; Manufacturing: -16,000; Mining: -19,000; Hourly Earnings: -0.1%; Unemployment Rate: 4.9% (Unchanged);
IN A NUTSHELL: "When the job market and the GDP numbers diverge, go with the employment numbers."
WHAT IT MEANS: Some politicians, economists and business commentators still believe the economy is going into the tank. Well, don't tell that to those doing the hiring in the private sector. Job gains soared in February and what made the number so impressive is that both the reeling mining and hurting manufacturing sectors cut back sharply. Meanwhile, the services sector hired as if boom times were here. Firms may be making a commitment to workers as the number of employees coming from temporary help firms actually declined. Big increases were recorded in construction, retail trade, health care, professional services, education, finance, restaurants and hotels. In other words, we added jobs at every skill and pay level.
As for the unemployment rate, it remained at 4.9% for the second consecutive month. That was not a surprise. But with the labor force surging, the participation rate rising and the number of frustrated workers declining, worker confidence is growing that it is now possible to either find a job or find a new job. The U-6 unemployment rate, which includes every person who has a beef with the labor market for any reason, hit its lowest level since May 2008 and is where it was in the spring of 2004. The rate could be lower, but it is clearly no longer high.
The one disturbing number in the report was the decline in hourly earnings. But as I have noted before, these data have only been around for a decade and we really don't know how the measure responds to changes in labor market conditions. There are better measures of compensation, but since investors seem to follow these numbers even though they don't really know what they mean, I have to report them.
MARKETS AND FED POLICY IMPLICATIONS: In the fourth quarter of 2015, the economy added workers at a robust 240,000 per month pace yet GDP grew by a meek 1%. So far this quarter, job gains have averaged 207,000, also a solid gain and the consensus growth rate for the current quarter is just a little over 2%. Really, does anyone believe that businesses are hiring like crazy if the economy isn't strong enough to require those added workers or there are real fears the economy is headed down the drain? Executives are being as conservative as possible so the strong job growth numbers point to a solid domestic economy. But that also means the economic concerns the Fed had in January have largely dissipated. The labor market is tightening, oil prices have stabilized, the equity markets are moving back up and fears of the world crashing and burning have eased. In other words, the Fed got fooled again. The members turned cautious last September when we had similar worries and then went into turtle position in January when they returned. This report allows the FOMC to send out signals that a second rate hike is coming. A good March employment report would provide all the cover the Fed needs. I think it happens in April. Janet Yellen has argued the Fed can increase rates at any meeting, not just one that has a press conference attached to it. She could prove her point after the April 26-27 meeting. That's my guess and I am sticking to it.
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