United States

Strong January jobs report takes aim at Fed patience


The main take away from the January jobs report is the potential for a reorientation of Federal Reserve policy rhetoric away from the word “patience.” The combination of strong economic data during the past year, and reports from our middle market clients of plans to increase hiring and boost capital expenditures, all point toward the likelihood the Fed will remove the word “patience” from its policy statement at the March meeting. This will also further shape interest rate expectations around the coming policy shift in June.

The strong increase of 257,000 in total employment reflects the above-trend growth rate of 4.1 percent during the past three quarters and the decline in the unemployment rate to 5.7 percent from 6.6 percent a year ago.

Particularly encouraging was the statistically significant monthly increase of 757,000 in the household survey, the 1.051 million person increase in the labor force and the move upward in the labor force participation rate to 62.9 percent. The increase in labor force participation was responsible for the uptick in the U-3 unemployment rate to 5.7 percent. Meanwhile, average hourly earnings increased 0.5 percent on a monthly basis and 2.2 percent from a year ago.

In our flagship economic product, “The Real Economy,” published on Feb. 4, we made the case for why wages are headed higher this year. This report reflected well upon that argument, and the 2.8 percent increase in average weekly earnings (0.5 percent month-over-month) reflect modest wage pressure building in the pipeline that will probably result in a move toward 3 percent this year. 

Middle Market Insight: Better economic growth and stronger wages will boost prospects for middle market firms, but may result in increased job churn and affect hiring policies and employee retention.

Twelve straight months of job growth above 200,000, a six month trend of 282,000, upward revisions to total employment of 147,000 during the past two months, and what we believe is a move upward in wages in the second half of the year, all suggest that an effective policy rate of zero is no longer appropriate for the U.S. economy. 

The one-year diffusion index, which is a gauge to analyze the distribution of job creation across the economy, increased to 81.7 from 70.9 a year ago. The goods producing sector increased by 58,000, construction 39,000 and manufacturing 22,000. The service sector expanded by 209,000, with trade and transport adding 59,000, business services 39,000, education and health 46,000, and leisure and hospitality 37,000. There was a loss of about 2,000 jobs in oil and gas extraction, but that was more than offset by the robust growth in professional and technical services of 32,500.

While there was much talk during the past two months about the potential impact on hiring from falling oil prices, what has been overlooked is the momentum that has been generated in professional business services and high tech, which is a reflection of strong private sector activity and the creation of higher-wage positions.

Source: McGladrey, BLS

At this point, U.S. economic activity is offsetting the drag from a weak global economy. The combination of higher disposable income from falling gasoline prices, improved job creation and a better wage will set the stage for what will probably be the best year yet in the economic recovery.

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