Digesting the January Employment Report

The stock market should stay in a range this week, as it digests the implications of the strong January Employment Report.  Rather than underscoring concern about impending recession, above-trend economic growth now appears to be in play -- a positive for the profits outlook.  Offsetting this positive, the Report dashed hopes for a a near-end of the Fed tightening cycle.  At this point, any conclusion about Q123 economic growth or the next Fed rate move has to be tentative.  The Fed will see another set of monthly data, for February, before the FOMC meets again.

The January Employment Report offered several indications of strong growth.  /1/ The 0.1% pt decline in the Unemployment Rate to 3.4% put it well below the 3.6% Q422 average.  A q/q decline in the Unemployment Rate is a significant sign of above-trend growth.  /2/ Total Hours Worked (THW) in January are up 4.6% (q/q, saar) from the Q422 average.  This is a strong start to the quarter, well above the 1.9% Q422 pace.  /3/ Personal Income looks like it should be strong in January, based on the jump in THW -- which could allay fears of a weakening consumer.  /4/ Manufacturing Output (in the Industrial Production Report, due February 15) should rebound about 1.0% m/m, based on THW. 

Also, the +517k Payroll jump clearly was huge.  To be sure, it probably can be explained in part by technical factors.  There appears to be an upward shift of about 25k in underlying m/m job growth from the benchmark revision.  Also, an unwinding of special factors that may have held down jobs and the Workweek in November/December -- /1/ holiday-related seasonal exaggerations and weather --  may have resulted in catch-up in January.  In addition, companies may have been overly cautious amidst talk of recession in late 2022.  In these cases, jobs should slow sharply and Workweek decline in February.  At this point, the Claims data (so far) and other evidence hint at a slowdown in February Payrolls, but the issue will be by how much.  The Fed can wait and see, since the February Employment Report (due March 10) will be released before the next FOMC Meeting (March 21-22).

The Report contained friendly data regarding wage inflation.  The 0.3% m/m increase in Average Hourly Earnings (AHE) was below the 0.4% prior trend.  About half of the 13 main sectors posted below-trend increases.  Nevertheless, with AHE revised up to 0.4% from 0.3% in December, the first-print for January has to be taken with some caution, as it too may be revised up in the next Report. 

The next key US economic report will be the January CPI (due February 14).  It can surprise to the upside, as well.  Gasoline prices are up, Used Car Prices have begun to rise at the wholesale level, and start-of-year price hikes could show up.  To be sure, natural gas prices have dropped, but it is not clear how much of the plunge will be captured in the data.  The stock market will probably trade cautiously ahead of this Report.  And, its implication for Fed policy also will be somewhat tentative, since the February CPI will be released before the next FOMC Meeting.