February Jobs Report and January Trade Deficit
Economics in a nutshell: “Neither snow nor sleet nor cold can keep businesses from hiring and the labor market from tightening.”
INDICATOR: February Jobs Report and January Trade Deficit
KEY DATA: Payrolls: +295,000; Private: +288,000; Unemployment Rate: 5.5% (down 0.2 percentage point); Hourly Wages: +0.1%/ Trade Deficit: $41.8 billion ($3.8 billion narrower)
IN A NUTSHELL: "Neither snow nor sleet nor cold can keep businesses from hiring and the labor market from tightening."
WHAT IT MEANS: Maybe the economy is not coming back down to earth. You don't have robust job gains if economic activity is softening, and the February jobs report was a biggie. Let's start with the surprisingly strong employment increase. Hiring was up across the board as over 64% of the industries reported increased payrolls - a very strong number. The only weak spot was temporary workers. But that may actually be good news. Businesses may finally be committing to full-time workers, an indication that the tightening labor market is forcing firms to rethink their hiring and retention strategies. There was a huge increase in the food services and drinking places industry. I guess people are eating out a lot more. The unemployment rate gapped down and now sits at its lowest level since May 2008. Some may focus on the drop in both the labor force and the participation rate, but the monthly numbers bounce around. Over the year, the labor force is up 0.8%, not far from expectations, while the participation rate has declined by only 0.2 percentage point, pretty much in line with demographic factors. And while the broadest measure of labor force underutilization is still relatively high, it is down 1.7 percentage points since February 2014. At that pace, we would be close to normal levels in a little over a year. But the one disappointment was hourly wages, which rose minimally after jumping in January. The yearly increase has been improving, but it is still too low. This is a lagging indicator and I am not really sure what it is saying.
The U.S. trade deficit narrowed sharply in January, as imports declined more than exports. The trade data are being affected by the recently resolved West Coast ports labor dispute and it will take months before the backlogs are cleared up. Thus, don't read too much in the monthly changes. That said, we started the year off with an inflation-adjusted deficit that was much larger than in the fourth quarter and given the government cannot adjust for work slowdowns, it is likely that trade will restrain growth this quarter.
MARKETS AND FED POLICY IMPLICATIONS: The labor market is the Fed's focus of attention. Hiring remains robust and the surging job openings argues for continued strong gains going forward. The unemployment rate is nearing full employment so the pool of available workers is shrinking rapidly – even when you add in discouraged workers. So why aren't wages rising faster? These data are lagging indicators and with major employers announcing pay increases, it is only a matter of time before wages, however we measure them, increase faster. I cannot imagine a Fed member saying that wage pressures are not a concern if the unemployment rate dips below 5%, which it could do this year. So the FOMC will have to start looking into the future, rather than the past – which is what the wage data reflect. As for the markets, the jobs report should remind investors that an earlier than expected rate hike cannot be ruled out.
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