The January Employment Report is bullish for stocks and Treasuries -- the report confirms a strong start for the economy in Q117 but one that is accommodated by an increase in labor market participation and is accompanied by low wage inflation. This combination raises the possibility that the supply side of the economy will expand to accommodate stronger GDP Growth in a non-inflationary way. It should keep the Fed on its gradual path of tightening -- if it tightens at all, but more on this in my next blog -- and almost assures that Yellen's Semi-Annual Monetary Policy Testimony (on February 14-15) will be benign.
The +227k m/m increase in January Payrolls looks to have been helped to some extent by the good weather (Construction, +36k, Real Estate Agents +12k) as well as by possibly other one-off factors (Retail Trade, +46k with less firing of holiday-related workers after less-than-normal hiring in Q416). But, the underlying pace is still strong after taking these temporary boosts into account.
The strong underlying pace should not be a problem for the Fed, given the uptick in Unemployment Rate to 4.8% from 4.7% in December. An increase in the Labor Force Participation Rate was responsible. While m/m changes in the Participation Rate could result from changes in the sample, as it stands the uptick raises the possibility that the sharp improvement in consumer sentiment since the election will bring more people back into the jobs market and thus allow for stronger trend GDP growth.
Meanwhile, the low 0.1% m/m increase in Average Hourly Earnings joins other recent data suggesting that wage inflation is well under control (see table below). Note that the small increase was on the low side of calendar considerations for this month. Along with the disinflationary implications of the stronger dollar, the inflation outlook looks benign.
AHE Employment Cost Index Compensation/Hour
(12-month (Q4/Q4 % change) (Q4/Q4 % change)
% change)
Jan 2017 2.5
2016 2.8 2.2 2.9
2015 2.5 2.0 3.1
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