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January Jobs Report

Written by: Frank Fazio

The first labor market report of 2018 was a continuation of the strength we witnessed for most of 2017.  The U.S. economy produced 200,000 jobs for the month of January, coming in above economists’ expectations of 177,000.  November figures were revised lower while December was revised slightly higher, for a net downward revision of 24,000 jobs.   Despite the downward revisions, the three-month average comes in a 192,000, which is above the 181,000 average for all of 2017.  The Unemployment Rate held steady in at 4.1% in December versus 4.7% at the end of 2016, maintaining a 17-year low.  However, the participate rate remain unchanged and hover near 40-year lows, as the rate of older workers retiring outpace the rate of new workers entering the labor market.

The most important feature of the report was wages, as wage growth came in better than expected for the month.  In fact, the 2.9% year-over-year growth vs the 2.6% expectation is the strongest the economy has seen since 2009.  Wages have been slow to move, despite the strong labor market gains.  If this growth trend continues, it may force the Federal Reserve to raise rates faster than expected.  For example, the market expectation of four rate hikes in 2018 was pricing in a 10% probability at the start of January, which increased to 25% by month end after stronger than expected economic data.  Expectations shot up to 30% after the jobs report this morning.  Consequently, yields on both short and intermediate term bonds increased after the report. In fact, the 10-year Treasury bond yield rose 30 bps for the month of January to yield 2.7%, and crossed 2.8% after this morning’s report for the first time since the taper tantrum of 2013.

Rising inflation expectations and the potential for a faster pace of tightening from the Federal Reserve resulted in a sell-off in equity markets after the report.  Still, we view wage growth as a positive development, since consumption accounts for 70% of the U.S. economy and higher wages allows companies to earn more on goods and services.  We will continue to monitor the pace of wage growth in our assessment of the economy and potential for tighter monetary policy from the Federal Reserve in 2018.