Bank of the West Instant Analysis of Today’s Employment Report for January

Instant Analysis of Today’s Employment Report for January


The January jobs report had something for everyone.  Nonfarm payroll revisions confirmed the strength and momentum in job creation in the fourth quarter (averaging +279K net new jobs a month in Q4), but the January figures reveal a noticeable chill in recent trends.  January nonfarm payrolls increased a smaller than expected +151K jobs, consensus had been looking for +190K. 


Private services was an important source of the weakness in January.  Business services added only +9K jobs last month with a decline of 25K jobs among temporary help firms.  Education and health only added another +6K jobs.  This is a sharp monthly reversal for two major sectors of the economy that have been an engine of job growth in this expansion.


On the bright side, job growth is starting to accelerate again in manufacturing.  In January, manufacturers added +29K jobs, and job creation in among manufacturing has been accelerating over the last three months. Construction job gains remained healthy at +18K, and retail trade (+58K) and leisure and hospitality (+44K) sectors continued to add new employees as consumers benefit from rising incomes and lower oil prices.  As long as consumer spending holds up, a chance of a U.S. recession this year remains a relative long-shot.


The U.S. unemployment fell below 5.0% last month to 4.9% as the new hiring swamped another large monthly increase in the labor force and labor force participation.  Wage growth also improved last month. Average hourly earnings increased 0.5% in January and was 2.5% higher than a year ago, while working hours also improved to 34.6 from 34.5 hours.  The average duration of unemployment ticked higher to 28.9 weeks from 27.6 weeks.


Bottom line, the January employment report was not the disaster the markets were bracing for, or even anticipating, suggesting that the strong downward move in bond yields and Fed interest rate expectations has been overdone.  Labor market momentum from a solid job performance in Q4 is clear and the drop in the unemployment rate today to 4.9% and improvement in average hourly earnings is a testament to that.  No recession in sight given the numbers released today. However, the softening in services job creation in January  bears watching, but probably just reflects a downshift into a more sustainable pace of expansion.  Implications for monetary policy:  a March FOMC rate hike will be a stretch in my opinion (I never had one in  my baseline forecast). The next rate hike from the FOMC will likely occur in the second quarter (probably in June), given the mixed trends coming from U.S. economic indicators into January.