The stock and Treasury markets have likely begun to shift to an economy-restraining mode as an offset to stimulative fiscal policy in a full-employment environment. But, this does not mean there could be overshoots and reversals of overshoots along the way. And, there is a macroeconomic reason why Friday's plunge may have been an overshoot.
Many commentators attributed Friday's stock market plunge and Treasury market sell-off to the ostensibly strong January Employment Report. The markets were said to conclude that the Report pointed to aggressive tightening by the Fed this year, based on the above-consensus +200k m/m Payrolls and the +0.3% m/m Average Hourly Earnings. However, the Report does not look especially strong behind these headline figures. It looks consistent with a continuation of gradual Fed tightening.
There were 5 parts of the January Employment Report that raise doubt about its overall strength:
The speedup in January Payrolls resulted from volatility in Retail Jobs, most likely stemming from seasonal adjustment. Seasonals look to offset post-holiday layoffs in the retail sector in January after looking to offset holiday hiring in November and December. The -25k m/m decline in December Retail Jobs (seasonally adjusted) shows there was less-than-normal holiday hiring that month. As a result, there was less-than-normal post-holiday layoffs in January, and Retail Jobs rebounded 15k that month. Excluding Retail Jobs, Payrolls rose 185k in both months. Remarkably, stability in underlying job growth occurred in pretty much every sector outside of Retail.
Nonfarm Payrolls (m/m change, 000s)
January December
Total 200 160
Retail 15 -25
Total Ex Retail 185 185
The 180k December-January average increase in Payrolls is in line with the trend seen by the Fed when it agreed on a gradual approach to tightening. The 2-month average essentially equals the 2017 m/m average. It is well below the peak pace seen in 2017.
Nonfarm Payrolls (average m/m change, 000s)
Dec-Jan 180
Oct-Nov 244
2017 181
Q417 216
Q3 142
Q2 190
Q1 177
There may have been a shift to part-time workers, raising a question about the quality of the recent job growth. Part-Time Workers rose for the 2nd month in a row in January, based on the Household Survey. They are up 138k since November, representing about 1/4 of the increase in Civilian Employment over this period. Part-timers said this was the only work they could find. This might reflect holiday-related hiring, but seasonal factors should have accounted for it. Since this figure is derived from the Household Survey, it is not comparable to the Payroll data. Also, the small sample of the Household Survey makes it not entirely reliable. Nevertheless, the upturn raises some question about the substance of the job growth over the past two months.
The Average Workweek fell sharply in January, down 0.2 Hour to 34.3 Hours. While a decline in the workweek is consistent with a shift to part-timers, this is probably not the reason -- the increase in part-timers from the Household Survey is not enough to make such a dent in the average workweek. The drop looks to be a fluke and may be weather related. Nevertheless, it depressed Total Hours Worked in January, taking some shine off the job growth.
The 0.3% m/m jump (with y/y up to 2.9% from 2.7% in December) in Average Hourly Earnings looks suspicious. It was only in supervisory and non-production workers, as AHE for Production Workers rose just 0.1% m/m. The latter's y/y was a benign 2.4% -- the same as in December 2017. A weather-related shift in composition toward higher-paid supervisors and non-production workers could be responsible for the January jump in AHE. An unwinding of this shift could hold down the February AHE to a 0.1% m/m increase (even taking account of an upward bias from the calendar) and 2.7% y/y. In any case, the January jump needs to be confirmed in February, by the y/y staying above 2.7%, in order to be viewed as significant.
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