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January Jobs Report

Economics in a nutshell: “The economy is hitting on all cylinders and if the surge in wages wasn’t a one-month wonder, we could really be off to the races.”

INDICATOR:  January Supply Managers' Manufacturing Survey and December Income, Spending and Construction

KEY DATA:  Payrolls: +257,000; Private: +267,000; Revisions: +147,000, Hourly Wages: +0.5%/ Unemployment Rate: 5.7% (+0.1 percentage point); Labor Force: +703,000

IN A NUTSHELL:  "The economy is hitting on all cylinders and if the surge in wages wasn't a one-month wonder, we could really be off to the races."

WHAT IT MEANS:   Remember all those stories about the economy slowing in January?  Well, never mind!  If conditions eased, it was only from breakneck speed to strong growth and that can be seen in the excellent employment report.  Payrolls were up strongly and the increase was on top of huge upward revisions to both November and December.  The gains in those two months averaged 376,000 and the three-month average was the strongest in about seventeen years – right in the middle of the dot.com bubble and the Y2K hiring binge!  One of the best aspects of the report was that the increases were spread across the entire economy.  There were more construction and manufacturing positions added than retail jobs.  The number of new workers added in the finance, professional and business services and education and health care was three times those hired in leisure and hospitality.  So let's put to bed the idea that all the economy is creating is low-paying jobs.  That is just a myth.  And maybe most importantly, wages surged.  The hourly wage jumped the most in over six years.  
 
Even the rise in the unemployment rate cannot be viewed as a negative.  There was a massive surge in the labor force and a rise in the participation rate.  These data underwent their annual benchmark revisions, so we need to be careful making any judgments.  That said, it has been expected that we would see some return of frustrated workers back into the labor market and the unemployment rate might increase, temporarily, as a consequence.  That could be happening.

MARKETS AND FED POLICY IMPLICATIONS: This was a really strong report, any way you slice and dice it.  Even the nattering nabobs of negativity will have to at least ease their criticisms of the economy.  Are all our problems over with?  Not by any means.  The number of people working part-time for economic reasons, while down sharply over the year, is still too high.  But that may be a consequence of changing business hiring decision, as firms want more part-timers compared to comparable periods.  If so, those numbers will remain elevated even when we hit full employment, which should happen during the summer.  The real issue remains compensation.  The surge in the average hourly wage was nice to see but it did make up for a sharp decline in December.  We need to see more solid increases in wages before we can say that the economy is truly in great shape.  Indeed, that is exactly what the Fed is looking for.  This report will probably pull forward some forecasts of when the Fed will start hiking rates.  The interesting issue is what the FOMC will say if the February employment report, which comes out before the March 17-18 meeting, again has a solid rise in compensation.  Could the members to start hinting that a rate hike is coming?  As for investors, it's once again the quandary of which is better: strong growth with higher rates or moderate growth with lower rates?  They may not have a choice.

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