iThe January Employment Report is a potentially significant positive for the economy and stock market. It raises the possibility that potential economic growth is stronger than the Fed’s assumption of 1.8-2.0%. This would mean not only that non-inflationary growth is higher than thought but so is potential profit growth. The key part of the report is not the huge +304k m/m jump in Payrolls, but the further increase in the Labor Force Participation Rate and associated uptick in the Unemployment Rate to 4.0%.
The increase in the Participation Rate could have been boosted by mild weather. But, being the 2nd increase in a row, it cannot be entirely dismissed. It means the supply side of the economy is expanding faster than population growth. The increase is even more significant, given the downtrend in the Rate suggested by the aging composition of the population. While both Civilian Employment and Labor Force fell m/m in January, the declines resulted from benchmark revisions to population. Without these revisions, BLS says Civilian Employment would have risen 237k m/m while Labor Force would have risen 259k. The benchmark revision had no effect on the Unemployment Rate. And, without the increase in the Participation Rate it would have fallen to 3.8%. Interestingly, the broadest measure of labor market slack — U-6 — actually jumped 0.5% pt to 8.1%.
The mild winter weather likely played an important role in boosting Payrolls this month. Job gains were strong in Construction, Educational Services (few school shutdowns), Leisure and Restaurants. Seasonals looked to offset weather-related job losses that did not occur.
Wage inflation remains in check. Average Hourly Earnings rose a modest 0.1% m/m, likely reflecting calendar considerations and an unwinding of December’s compositional boost. The y/y dipped to 3.2% from 3.3% — the pace in line with other labor cost measures.
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