January’s Employment Gains Solid

Posted By Scott Anderson In Economic Outlook | No Comments

[1]The January payroll report was a solid report across most metrics.

The headline nonfarm payroll gain of 225k jobs last month handily beat analysts’ forecasts looking for a gain of 165k jobs in January. U.S. nonfarm payroll growth was 1.8% on an annualized basis last month.

The 3-month average monthly job gain improved to 211k in January up from 154k last July when the Fed started cutting interest rates. But rather than celebrating, the U.S. January jobs data already feels a bit stale. The growing risks to Chinese and global growth from the emerging Coronavirus will likely tarnish some of the shine coming from the U.S. labor market in the months ahead.

The January job gains were clearly bolstered by milder than normal winter weather last month, making the seasonally adjusted jobs data appear more favorable. The benefits of the Fed rate cuts from last year were also visible in the construction, transportation, and leisure and hospitality job gains. Construction payrolls jumped by 44k jobs last month as housing construction reaccelerated on falling mortgage rates. Census hiring also shone through as government payrolls increased by 19k jobs last month with Federal government payrolls rising 12k jobs alone.  Education and health care added a robust 72k jobs.

On the downside, U.S. manufacturing payrolls fell by 12k jobs in January and have contracted in three of the past four months. The Boeing 737 Max production shutdown probably added to the manufacturing payroll declines last month. Modest net job loss was also seen in retail trade (-8k), temporary help services (-2k), and financial services (-1k) last month.

Moreover, the U.S. unemployment rate ticked higher to 3.6% in January from 3.5% in December. The increase in the unemployment rate last month was driven by an 89k job decline in household employment. The unemployment rate is calculated from a more volatile household survey on employment than the establishment survey. Also, earnings growth remains lackluster.

Average hourly earnings increased 0.2% last month up 3.1% from a year ago. But in inflation adjusted terms, real average hourly earnings were up only 0.6% year-on-year in December. Hours worked increased 0.2% last month with a strong 0.9% gain in construction hours, but a 0.1% decline in manufacturing hours.

Taking a longer-term view, we see a rising disconnect between overall job growth and job gains in the manufacturing sector. We think this weakens the foundation of sustained nonfarm payroll growth at the pace we have seen in recent months.

Chinese and global growth forecasts continue to be cut, which could intensify the already steep headwinds for U.S. manufacturers coming from the Boeing production shutdown. U.S. automobile manufacturers, information technology, trade and tourism, and leisure and hospitality sectors are most at risk right now. They face supply chain disruptions, rising production costs, and weakening sales and demand globally.

Bottom-line, U.S job growth is still performing above expectations through January, but it’s going to be far harder to repeat the performance over the balance of the year.

Taking a longer-term perspective, the growing disconnect between manufacturing and services job creation, the deterioration in real earnings growth, and  downside risks to demand from the Coronavirus, should keep investors on the defensive side. Today’s jobs data was not weak enough to get the Fed to move off the sidelines, however. They will remain in wait-and-see mode at the March FOMC meeting, but will begin pointing to growing downside risks to U.S. growth and inflation.

To learn more, check out this week’s U.S. Outlook. [2]


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[1] Image: https://changematters.bankofthewest.com/wp-content/uploads/2019/03/Waiting-game_crop.jpg

[2] U.S. Outlook.: https://changematters.bankofthewest.com/wp-content/uploads/2020/02/BankoftheWest_USOutlook_02_07_20.pdf

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