The Bottom Line: Economic data provided nice surprises this week. The January jobs report showed an increase of 225,000 jobs along with an uptick in the labor participation rate and solid wage growth. The Institute for Supply Management’s (ISM) manufacturing report showed the first expansion in manufacturing activity in 6 months. The ISM’s non-manufacturing report showed the services sector index at its highest level since August. This economic growth story helped provide some lift to stock prices, but interest rates remain stubbornly low. The growth story may not be a match for the coronavirus-related fears gripping the market.
On Friday, the U.S. Bureau of Labor Statistics released its January jobs summary which reported growth in total nonfarm payroll employment of 225,000 and little change in the headline unemployment rate at 3.6%.
The 225,000 employment increase surprised to the upside and continues to show a strong, stable U.S. job market. The report easily outperformed economists’ expectations surveyed by Dow Jones, who were looking for payroll growth of 158,000. A mild winter weather month provided a nice boost to January employment as weather-sensitive industries such as construction added 44,000 jobs and leisure & hospitality added 36,000 jobs. On the other end of the spectrum, manufacturing continues to show weakness as the sector reported a decrease of 12,000 jobs.
The unemployment rate moved 0.1% higher to 3.6%, but for the right reason, as the labor force participation rate increased 0.2% to 63.4%, matching its highest level since June 2013. And, if we narrow the participation rate to 25-54-year-old “prime-age” workers, their workforce participation rate is up 2.5% from the trough, matching its highest level in 11 years.
An increase in the labor participation rate is encouraging as it shows that there are opportunities for workers who may have been left behind in this post-Great Recession economic cycle as well as proving that companies can continue to add workers in a tight labor market. The 3.6% headline unemployment rate is at 50-year lows.
Reported wage growth was solid as well, with average hourly earnings climbing 3.1% from a year earlier. While wage growth has cooled slightly from its 2019 peak of 3.5%, it is still outpacing the 2% growth rate that U.S. workers experienced for much of this economic expansion cycle.
It’s a robust jobs report that comes on the heels of good manufacturing and services data. On Monday, the Institute for Supply Management (ISM) reported that its index of national factory activity increased to a reading of 50.9 in January. A reading above 50 indicates expansion activity in the manufacturing sector, which accounts for 11% of the U.S. economy. The ISM index had held below the 50 threshold (contracting) for five straight months going back to July 2019. The improvement in manufacturing data is likely tied to improving trade relations with China after the signing of the Phase 1 deal.
I should note that the ISM’s factory employment index increased to 46.6, but still remains below 50, suggesting manufacturing payrolls could remain weak. This figure came to bear in the actual January jobs figure above.
On Wednesday, the ISM reported that its non-manufacturing activity index increased to a reading of 55.5 last month, the highest level since August. The service sector comprises almost 70% of the economy, and although U.S. consumer spending growth has slowed, it has shown remarkable consistency. The latest report shows an uptick in new orders, suggesting the economy could continue to grow moderately this year.
To recap, the US had improving manufacturing data along with good services data and employment data released this week. So, why aren’t interest rates moving higher along with economic growth surprises?
The Federal Reserve has forecast that it is likely to keep interest rate moves on hold through the rest of the year. In his Federal Open Market Committee press conference on January 29th, Fed Chair Jerome Powell stressed that he is concerned that persistently low inflation might continue to weigh on interest rates. Fed officials wanted to highlight their commitment to 2% inflation as a target to be achieved “symmetrically,” not as a “ceiling” to an acceptable range. Inflation has remained stubbornly low deep into an economic expansion with very low unemployment, a time “when in theory, inflation should be moving up.” We can’t necessarily fully blame it on neutral federal funds rate policy, but it appears that there is a downward bias in interest rates until we get an inflation scare of some kind.
Probably more importantly, the spread of the coronavirus has unnerved some global investors, leading to an increase in volatility in global stocks and a move lower in bond yields. As you will note in the chart below, the confirmation by the World Health Organization of coronavirus transmission has corresponded with a 0.2% drop in the 10-year U.S. Treasury yield even as the Citi U.S. Economic Surprise index has spiked.
Typically, these epidemics have had a short-term impact, but uncertainty and risk to the global economic outlook are manifesting in interest rates. Bloomberg Economics estimates that the coronavirus could impact 1st quarter global GDP growth by almost half a percent.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist