Solid Job Numbers Clash With Fed Dovishness

Feb 01, 2019
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The January Employment Report was released this morning and came in stronger than expected but some of the upside surprise was tempered by a big downward adjustment to December’s original outsized headline job growth number.  While the headline job growth number easily beat at 304k versus 165k expected,  December’s originally reported 312k gain was adjusted to 222k. Also, wage gains rose only 0.1% versus  0.3% expected but the YoY gain remained at 3.2%, as expected. Two issues will color the reaction to this report: one being the government shutdown during the month and the Fed meeting on Wednesday that effectively put future rate hikes in doubt for the foreseeable future. The shutdown drove increases in both the unemployment rate (4.0% from 3.9%) and the underemployment rate (8.1% from 7.6%) but those increases are likely to be discounted.  In summary, it’s a solid report that should continue a risk-on tone for stocks,  while the recently dovish Fed keeps any upward move in yields limited. 


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For the month, 304k jobs were created which easily beat the 165k forecast but the above-trend 312k print in December was revised considerably lower to 222k so that will add some uncertainty as to whether the January figure is subject to a big revision next month. Also, we should note the Establishment Survey, which is used to derive the job growth numbers, reflected most of the furloughed government workers and contractors as employed as they were on payrolls during the survey week (Jan 12th) and worked and/or received pay which is the criteria. Over the past year monthly job gains have averaged 234k so January’s results beat the annual average indicating continued momentum in the labor market.    Digging into the categories, 224k service-providing jobs were added during the month (74% of total job growth) versus 153k in December. Gains were led by the leisure and hospitality category —odd for January—which posted +74k new jobs and health-care/social assistance (+45k) was the other category driving the service sector gains.  72k goods-producing jobs were added (26% of the total), which is up from 53k added in December with construction (+52k) adding the lion share of the jobs in this category—also odd for January. 


Moving to pocketbook issues, wages met the YoY expectation but missed on the monthly gain. Average hourly earnings rose 0.1% for the month compared to 0.3% expected, while year-over-year earnings rose 3.2% after three straight months at 3.3%, the highest for this cycle.   The YoY wage gain sticking over 3.0%, and the continued solid trend in job gains, may temper some of the Fed’s newly displayed dovishness, but until inflation pressures start to unequivocally move over 2.0%, the rate pause is likely to remain in effect. 


One blemish in the report —and it has an excuse—is that the unemployment rate rose one-tenth to  4.0%  after being as low as 3.7% a couple months ago. The one-tenth increase missed the unchanged market expectation but the government shutdown offers an excuse for the back-up. The unemployment rate is derived from the Household Survey which is a phone survey that asks respondents, among other questions, whether  they are working or not.  Some furloughed government employees and contractors may have replied they were not working but would have,  in fact, still been on a payroll which is the source for the job growth numbers as mentioned above.   Thus, the number of unemployed increased by 241k for the month. Despite the month-over-month uptick in the unemployment rate, the Fed and the market will likely discount that result with expectations it will move back under 4.0% after the shutdown distortions dissipate.


The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) was also buffeted by the shutdown. The rate rose five-tenths to 8.1%, but the increase is mostly attributable to workers caught up in the shutdown. While unemployed persons increased 241k, the underemployed number was also driven higher by a 490k increase in part-time workers  (surely a response to the shutdown) and an increase of 122k in the ranks of the marginally attached (those willing to work but not actively looking). Those increases to the numerator were met with a mostly unchanged denominator as the labor force dipped by an immaterial 11k. The 8.1% rate is likely to fall next month after the shutdown-related impact dissipates but it should still reside close to the 7.9% - 8.2% range that prevailed prior to the recession.


The labor force participation rate (labor force divided by civilian population) rose two-tenths to 63.2%, the highest in five years. While the labor force was largely unchanged in January the participation rate was driven higher by the annual adjustment to the civilian population that the BLS conducts every January based on updated Census Bureau data. The adjustment cut the population by 649k leading to the participation rate increase. The rate still pales in comparison to the 66% level that prevailed pre-crisis but the 62.7% to 63.2% participation rate range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains. 


In summary, this report will be viewed positively by the market but with the government shutdown influencing some of the numbers, and the suddenly dovish Fed, the impact on market direction will be more limited. The short-end will be focused on the Fed rate pause while long-end yields may be pressured higher if inflationary pressures build. That is, if the labor market strength and wage gains continue and inflation starts to creep above the 2% benchmark level the Fed’s newfound dovishness will shift.




chart icon  Labor Force Participation Rate Hits Five-Year High

The labor force participation rate has been one of those labor-related metrics that has shown real resistance to moving anywhere close to pre-crisis levels. As the graph shows the rate ran in the 66% range prior to the Great Recession and really hasn’t recovered much from the lows earlier this decade. The 2/10ths pop in January is a result of a downward annual adjustment to the civilian population based on updated Census Bureau calculations. Thus, while the participation rate increase looks good on its face, the labor force level remained unchanged while the lower population estimate drove the increase in the participation rate. 


Labor Force Participation Rate Hits Five-Year High



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Market Rates



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