Of all the myriad economic releases, both investors and economists generally put special emphasis on the monthly nonfarm payroll report.
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.