Doves vs. Hawks: January’s Jobs Report Deals the Hawks a Better Hand
Employment gains for January came in below consensus expectations of 181,000 and were a bit of a disappointment. The 151,000 January increase was down from 280,000 in November and 262,000 in December. However, monthly growth around 220,000 can’t be sustained in an environment with 2.5 percent real GDP gains. In other words, job growth had to moderate.
Mining lost another 7,000 jobs in January, reflecting the weakness in the oil patch from the drop in prices. Since peaking in September, 2014, mining employment has fallen 146,000, a decline of 17 percent. The biggest negative surprise in January’s establishment survey was the 39,000 reported decline in private educational service jobs, which appears to be attributable to the larger than normal seasonal hiring in November and December. Temporary help services shed 25,200 jobs during January. A positive surprise was that manufacturing added 29,000 jobs in January, indicating that the worst of the slowdown (from weak foreign demand, collapsing investment in oil exploration and an inventory overhang) may be ebbing.
Household Job Gains Exceed Establishment Over Past Three Months
The household survey showed a job gain of 615,000 in January, following December’s 485,000 increase. Yes, that is 1.1 million new jobs over the two months! The household survey is based upon a smaller sample, making it more volatile on a monthly basis than the establishment survey. But two months of strong household readings indicate that the probability of the U.S. economy heading into recession is fairly low, maybe 15 percent at the highest. Additionally, January’s unemployment rate of 4.9 percent (also from the household survey) is the lowest since the Bear Stearns collapse heralded the beginning of the financial crisis. The falling unemployment rate wasn’t due to a contracting labor force, and the average workweek expanded, a good harbinger for future hiring.
Wage Growth Eclipses 2.5 Percent as Unemployment Falls Below NAIRU
The most encouraging signs in January’s report were the 0.5 percent monthly gain in average hourly earnings and the acceleration of the annual pace to 2.5 percent. This further supports the hawks’ case at the Fed that they made the correct call in raising interest rates in December. The hawks believe it is their responsibility to move in an anticipatory manner in conducting monetary policy before tightening labor markets push core inflation too high. If monthly job gains slip to 180,000 in 2016 and hourly earnings edge up closer to 3 percent, real disposable income growth should continue to support consumption and housing, obviating concerns about the U.S. recovery stalling.