Job Gains Back Over 200k but Treasuries Unimpressed
The January jobs report beat expectations but not strong enough to move the Fed off the pause button (think Goldilocks). Job gains totaled 225,000 in January versus 165,000 expected and 147,000 the prior month. The pop in job growth was a nice surprise after two straight months with gains well below 200,000 and below the 176,000 average in 2019. The bifurcation of the economy, however, continues with strength exhibited in the services sector which continues to add jobs in the 140,000-190,000 range, while manufacturing struggles to add jobs (manufacturing jobs declined by 12,000 in January). Meanwhile, wage growth continues to be somewhat tepid with a monthly gain of 0.2% versus 0.3% expected while YoY the gain was 3.1% versus 3.0% expected. Finally, the unemployment rate moved up a tenth to 3.6% after two straight months at the cycle low of 3.5%. In summary, solid service-providing job growth and generally stable unemployment rates will keep the Fed in pause mode, but the mediocre wage gains and continued struggles in adding jobs in the manufacturing sector will merit ongoing Fed attention.
- For the month, 225,000 jobs were created versus an expected increase of 165,000. The January number represents a nice pop after two straight months of gains well below 200,000. Private service-providing jobs moved back to trend with 174,000 new jobs versus 147,000 in December. Outside of the December dip, service-providing jobs have ranged from 174,000 to 202,000 new jobs since over the last three months. Healthcare and transportation-related jobs provided most of the services sector uptick from December. Goods-producing jobs, however, continue to struggle with a net increase of 32,000 with construction jobs providing the bulk of the gains which coincides with favorable weather conditions during the month. Manufacturing saw 12,000 jobs disappear (most of that in motor vehicle and parts manufacturing) as the struggles in that sector continue.
- Average hourly earnings printed a 0.2% gain for the month missing the 0.3% forecast. Year-over-year earnings, however, beat with a 3.1% print versus 3.0% expected. That being said, YoY wage gains remain stuck around the 3.0% level versus moving materially higher as was the case early in 2019. February 2019’s gain of 3.4% YoY remains the high for this cycle but that pales in comparison to the 4.0+% gains in expansions past. That means demand-pull inflation stemming from growing wages is likely to remain muted and that will keep the Fed in pause mode until that YoY rate moves materially higher.
- The unemployment rate ticked a tenth higher to 3.6% (3.579% vs. 3.496% in December). The Household Survey—which is used to generate the various employment ratios— saw 139,000 persons added to the rolls of the unemployed (5.892 million versus 5.753 million) while 50,000 persons were added to the labor force denominator (164,606 million vs. 164,556 million). After dropping somewhat methodically during the first half of 2019, the unemployment rate is settling around the 3.5% level which it first hit back in September. The stability in the unemployment rate is an indicator of underlying labor market strength.
- The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached) rose two-tenths after hitting a cycle low of 6.7% in December which also remains the all-time low since the series began in 1994. As mentioned, unemployed persons increased by 139,000 and part-time workers increased by 34,000. The addition in both categories contributed to the two-tenth increase in the underemployment rate.
- The labor force participation rate (labor force divided by civilian population) improved two-tenths to 63.4%, but the increase had more to do with annual population revisions than improvement during the month. As mentioned, the labor force increased by 50,000 people while the civilian population denominator fell by 679,000 but that was due to annual revisions rather than an actual population decline during the month. The January rate is a new cycle high but it pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.4% 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, job growth back over the has 200,000 level after two straight months below indicates the labor market continues to exhibit healthy momentum. The bifurcation of the economy, however, continues with strength exhibited in the services sector which continues to add jobs in the 140,000-190,000 range, while manufacturing continues to struggle in adding any net jobs (manufacturing jobs declined by 12,000 during January). The absence of gains in better-paying manufacturing jobs is no doubt a factor in the tepid wage growth. While the YoY rate of wage gains improved to 3.1% from 3.0% in December, that rate is not going to stoke much of an increase in consumption and/or demand-pull inflation and that means the Fed will continue on hold for the foreseeable future.
YoY Wage Gains Remain Tepid
With the Fed in pause mode, and likely to stay there well into 2020, wages and growth in the labor force will be an early tell on when the Fed may move off the pause button. While the headline beat in jobs from today’s report may lead some to think the Fed may be gearing up for a rate hike as the next move, the muted action in YoY wage gains will likely keep the Fed firmly in pause mode for the foreseeable future. In fact, if monthly job gains moderate and YoY wage gains remain tepid, the Fed will be back in easing mode, especially if inflation remains docile, as expected. For now, those conditions don’t exist but expect the Fed to be aware of and watchful over wages as we move through 2020.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||1.55%||+0.01%||1 Mo LIBOR||1.67%||-0.01%||FF Target Rate||1.50%-1.75%||3 Year||1.418%|
|6 Month||1.56%||+0.01%||3 Mo LIBOR||1.74%||-0.01%||Prime Rate||4.75%||5 Year||1.420%|
|2 Year||1.41%||+0.11%||6 Mo LIBOR||1.76%||+0.01%||IOER||1.60%||10 Year||1.546%|
|10 Year||1.59%||-0.08%||12 MO LIBOR||1.83%||+0.02%||SOFR||1.59%|