Implications: If this is how the economy does when the government is shut, maybe we should have kept it shut longer. Only a week ago, some analysts were bemoaning the partial government shutdown, saying it could lead to a recession. But payrolls rose 304,000 in January, the largest increase in almost a year and easily beating the highest forecast from any economics group. Meanwhile, civilian employment, an alternative measure of jobs that includes small business start-ups, rose 238,000. In the past year, nonfarm payrolls are up 234,000 per month while civilian employment is up 220,000 per month, a robust trend either way. Although the unemployment rate rose to 4.0%, that was due to the government counting furloughed workers as unemployed even though they would ultimately get paid. We anticipate a drop in the jobless rate to 3.8% next month. One of the best details in today's report was a 497,000 increase in the labor force (people who are either working or looking for work). The labor force has increased by 213,000 per month in the past year and the participation rate is now 63.2%, the highest since 2013, showing strength in the economy offsetting the effects of an aging population. Meanwhile, the share of the adult population that's working hit 60.7%, the highest since 2008. Although average hourly earnings rose a tepid 0.1% in January, these earnings are up 3.2% in the past year. Meanwhile, total hours rose 0.3% in January and are up 2.4% in the past year. As a result, total cash earnings are up 5.7% in the past year, easily surpassing inflation and more than enough to keep consumer spending growing. We think this shows that the Federal Reserve is being unnecessarily cautious about raising interest rates. The US economy warrants higher short-term rates. Regardless, it looks like the Fed will remain on hold until we get more clarity on issues like the federal budget impasse, trade negotiations, and Brexit, the resolution of which should send the 10-year Treasury Note yield to the 3.00% level we think the Fed wants to see before lifting rates again. In the end, we think the 10-year yield rises due to solid economic data like today's employment report and the Fed ends up hiking rates twice in 2019, maybe more if yields rise enough. Not every jobs report will be as strong as January's, but those fearing a recession or significant slowdown are way too bearish.
Click here for PDF version
|
Posted on Friday, February 1, 2019 @ 10:54 AM
|