The January 2018 jobs report practically confirmed what we all suspected – the U.S. economy appears to be firing on all cylinders. In January the economy added 200,000 jobs. The figure surpassed the 180,000 economists were expecting:
Non-farm payrolls rose by 200,000 in January, topping economists’ expectations for 180,000, according to a Thomson Reuters poll. That compared with a revised 160,000 in December. The report showed strong employment growth in construction, food services and healthcare …
The unemployment rate held steady at 4.1 per cent for the fourth consecutive month, in line with expectations. “It definitely makes it a bit more likely that the Fed will has to do more than the three hikes that they’re currently planning for this year,” said Luke Bartholomew, strategist at Aberdeen Standard Investments. “US bond markets aren’t going to like it though. Treasuries have been suffering a sharp sell-off and such strong numbers are going to pour fuel on the fire.””
The jobs number was up from the 160,000 jobs added in December, and off the 259,000 jobs added in the year earlier period. Construction and leisure and hospitality were particularly strong, having grown jobs by 36,000 and 35,000, respectively. If interest rates continue to rise due to fears of inflation or simply due to the Fed’s unwinding of its $4 trillion bond portfolio, it could choke off construction.
Unemployment Rate Remained At 4.1 Percent
The unemployment rate of 4.1% was the same as that of the previous month and down from 4.8% versus the year earlier period. With an unemployment rate of 5.0% or less, economists consider the economy to be at full employment. That is usually considered a good thing. If there is no slack in the labor market, then potential employees should be able to demand higher wages in order to [i] enter the labor market or [ii] keep from switching jobs. If that theory holds, then we should also see strong wage growth.
The rub is that higher wages could drive higher interest rates, and potentially hurt the stock market. Over the past decade rising stock prices has been considered good for the economy. That said, average hourly wages of $26.74 were up 0.3% versus December 2017, and up 2.9% Y/Y. The Y/Y gain was the fastest rate of growth since 2009 and topped forecasts of 2.7%. It also gave credence to the notion that since the unemployment rate signals we are beyond full employment, workers could potentially demand higher wages by playing employers against each other.
Wage growth could quicken once President Trump’s tax cuts fully kick in. Companies could share their windfall in the form of higher bonuses to employees. They could also buy back more shares and spike stock options for executives. Financial markets reacted immediately to higher wage growth. Ten-year treasuries exceeded 2.8% for the first time in over eight years. The Dow Jones (DIA) sold off immediately, and is off over 3% since the jobs report was announced. Ten year treasuries are the key to mortgage rates. Also, several companies took out-sized risks – share repurchases, acquisitions – when rates were at record lows. Companies’ cash flows could be hampered when cheap debt has to be refinanced at much higher rates. This could be a cause for concern for financial markets going forward.
