The jobs report provides a timely snapshot on the health of the labor market, a critical issue because household spending drives roughly 70% of U.S. economic activity and a second part of the Fed’s dual mandate focuses on full employment.
For these reasons, investors will be closely watching the U.S. Department of Labor’s release of January job data this Friday. Though I’m skeptical that one month’s number will have any impact on Fed tapering, a continuation of the recent trend of weak data may color the Fed’s language around forward guidance. In addition, another weak print would call into question the investment thesis that the U.S. recovery is likely to accelerate this year. Given the significance of the release, here’s what I’d focus on come Friday’s jobs report:
Change in nonfarm payrolls. The market is expecting a headline print of 184,000 additional nonfarm jobs, right around the two-year average of 182,000. In other words, investors are treating last month’s reading of 74,000 new jobs as an aberration, driven mostly by unseasonably cold weather. To the extent January’s temperatures were little better, job creation may once again disappoint due to weather related issues. To gauge the impact of weather, watch sectors like construction. A big drop there would confirm that part of the issue is indeed weather related.
Participation rate. Weather aside, last month’s reading once again demonstrated that the unemployment rate has been falling mostly thanks to a falling participation rate, i.e. fewer Americans participating in the work force. Any further drop in the participation rate, currently at a 34-year low, means that any improvement in the unemployment rate should be largely ignored.
Hourly Wages. As evidenced by last week’s report on personal income,lackluster wage growth is still a major problem. The economy is not creating jobs at a fast enough rate to overcome the structural headwinds – technology and the global labor arbitrage – that are suppressing real incomes. Last month, hourly wages decelerated to a 1.8% growth rate, a 9-month low. Assuming wage growth remains stuck below 2%, this would confirm the lack of any organic income growth and suggests that the recent jump in consumption may not be sustainable.
To be sure, investors should never place too much importance on any one economic number, particularly one that is potentially distorted by exogenous factors like weather. For that reason, I don’t think the Fed will be moved to change its current policy, regardless of Friday’s nonfarm payroll report.
Still, in the event of another weak number market, participants will want to at least revisit their assumptions regarding the U.S. economy. Another weak month, particularly if wages remain stagnant, suggests that, once again, economic optimism may need to be tempered.