Markets, the Fed see two different economies: robust vs. solid

Markets, the Fed see two different economies: robust vs. solid
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A steady rise in the latest employment report reinforces the Fed’s notion of a “solid” economy as described in this week’s January Federal Open Market Committee statement. Steady, however, leaves much to be desired with market expectations pricing in a robust economy, particularly in the aftermath of tax reform.

Nonfarm payrolls rose 200,000 in January, more than the expected 180,000 rise, according to Bloomberg, and a two-month high. December payrolls were revised up from 148,000 to 160,000, while November payrolls were revised lower from 252,000 to 216,000.

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As a result, the overall change in nonfarm payrolls (January data + net revisions) was a modest 176,000. The three-month moving average, furthermore, declined from 216,000 to 192,000 in January, a two-month low.

 

In the details, total private payrolls rose 196,000 in January, a two-month high. Goods producing payrolls increased 57,000, on par with a 55,000 rise the month prior. Construction payrolls gained 36,000 in January, a two-month high, and manufacturing payrolls increased 15,000, following a 21,000 rise at the end of 2017.

Service payrolls increased 139,000 in January, following a 111,000 gain in December. Trade and transport payrolls rose 34,000 at the start of the new year, thanks in part to a 15,000 increase in retail payrolls, a two-month high. Information payrolls, on the other hand, posted a drop of 6,000 in January, the third consecutive month of outright decline.

Business services payrolls rose 23,000 in January with a 2,000 gain in temporary hires, and financial services increased 9,000, a two-month high. Education payrolls rose 38,000 at the start of the year, a respectable gain on a nominal level albeit a two-month low, while leisure and hospitality, a consistently strong contributor, gained 35,000, also a two-month low.

Government payrolls increased 4,000 in January, the first month of increase since August. Since June 2017, government payrolls have added only 23,000 payrolls. Federal payrolls rose 5,000 at the start of the new year, nearly offsetting the 6,000 decline reported in December.

Complimenting solid topline job creation, wage growth increased markedly at the start of the new year. Average hourly earnings rose 0.3 percent in January, one-tenth of a percentage point more than expected, according to Bloomberg, and following a 0.4-percent increase in December.

Year-over-year, wages increased 2.9 percent in January, up from a 2.7 percent pace reported last month, and the most since June 2009. 

Unsubstantiated at this point with just one month’s improvement, a sizable pickup in wages at the start of the new year offers credence to the FOMC's anticipation of further price pressures building in the near-term. 

Of course, wages have been increasingly volatile as of late, reaching near-3 percent back in early 2017 before paring back most of the gains toward the end of the year. 

Additionally, the personal consumption expenditures inflation report earlier last week failed to support the notion of rising inflation, holding steady at 1.5 percent for the second consecutive month. 

Finally, the labor force increased by 518,000 in January and household employment rose 409,000. As a result, the unemployment rate was unchanged at 4.1 percent at the start of the new year, a more than 17-year low.

Additionally, the participation rate remained steady at 62.7 percent in January for the fourth consecutive month, a multi-decade low as millions of Americans remain detached from the labor market. Finally, the work week declined from 34.5 to 34.3 in January, a four-month low.

We’re still not seeing robust job gains, with the average pace slowing below 200,000 in January, and we’re not yet talking about sustained wage improvement.

Steady appears to be the new bar, and according to market sentiment, steady appears good enough to further support expectations of three additional Federal Reserve rate hikes this year.

According to Bloomberg, the probability of a March rate increase is now near certainty at 93 percent. 

Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. Her research has been published in the Harvard Business Review and in textbooks for Northwestern University's Kellogg Graduate School of Management. She's a regular guest on CNBC, Bloomberg, Fox News and CNN.