The January jobs numbers just hit and there is nothing but good news to report. Many market pundits had this incredibly wrong and were on the lighter side of the estimate. Jerome Powell came out on Wednesday with a 25bps increase in Fed Funds rate which the market took in stride. So why is today’s report a negative for the Fed?
The Fed is wanting to slow down economic growth and quell inflation in which they deemed transitory in 2020. Today's nonfarm payroll numbers rose by 517k and the unemployment rate was little changed at 3.4 percent. Job growth was led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government reflecting striking workers going back to work.
The data just released is not showing signs of an economic contraction. The Fed is wanting to engineer a “soft landing” and they use the Fed Funds rate to reduce growth and their balance sheet runoff know as “quantitative tightening” to reduce the money supply. A combination of the two allows for them to control overall economic growth and inflation, however, they have increased rates over 4.5% from the zero bound in a span of 12-months and the economy is still roaring along.
This report is staggering not only in the increase in the overall number of employed, but also in the revisions from prior months. Revisions for November and December showed a combined increase of 71,000 employed, higher than previously reported. Job gains were virtually across the board in this report.
The sticky part of the inflation number remains to be wages. Average hourly earnings for all employees on private confirm payrolls rose by 10 cents, or .3 percent to $33.03. Over the past 12 months average hourly earnings have increased by 4.4%. The average work week increased across the board as well averaging 34.1-40.5 hours per week.
The Fed will continue to look at the wage number as it remains one of the sticky measures of inflation. The reason it is considered sticky is because once you increase a wage it becomes very difficult to lower that wage in the future. Instead of lowering that wage for that current position, most employers would have to reduce headcount to save on cost.
The Fed will likely see this number as a reason to continue its hiking cycle as they are data dependent. We are not market prognosticators, however, the market should see this as a hawkish signal for the Fed to continue their interest rate hiking cycle. Higher rates usually means higher discount rates for growth, which begats lower equity prices. While this number shows continued growth in our economy, we all understand that the interest rate increases have a lag effect, and meaningful impacts from the Fed may be felt in later months.