Unemployment Rate Steady At 4.1% For 4 Straight Months

The past few days have had a high intensity of news flow as the stock market had a mini melt down and earnings season kicked into high gear. Therefore, some of my analysis has been delayed by a few days. I am now going to review the jobs report which came out on Friday.

Solid Headline & Acceleration In Hourly Earnings Growth

As I expected based on the low jobless claims and the solid ADP report, the BLS non-farm jobs report for January was good again. It showed 200,000 jobs created which beat estimates for 180,000 jobs created. On the negative side, the 2 previous months’ revisions had a net change of -24,000 jobs. The unemployment rate stayed at 4.1% for the 4th straight month. As you know, the year over year change in the unemployment rate is a critical indicator I review. The unemployment rate in January 2017 was 4.8%. We’re still far from seeing a negative rate of change, but I expect that to be hit in late 2018 or early 2019. In the midst of the panicking on Wall Street, it’s important to review how far out the cycle is from a recession. We may be in the late stages of the bull market, but it probably has 1-2 years left.

The most discussed figure in the jobs report was hourly wage growth. It showed 2.9% growth which beat estimates for 2.6% growth. The actual wages went from $25.99 an hour to $26.74. Growth was 0.3% month over month which beat expectations by 0.1%. As you can see in the chart below, the growth rate was the highest since June 2009. Some traders on Wall Street joked that this improvement caused the stock market decline on Friday and Monday because it caused inflation estimates to increase.

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The reason why this joke is ridiculous is that the hourly wage growth is meaningless without improvements to the length of the work week. The only thing that matters to the economy is take home pay, not the time it took to earn the money. The work week shrunk from 34.5 hours to 34.3 hours which means the hourly earnings growth didn’t translate into an acceleration in take home pay growth.

The chart below shows the weekly earnings growth was down from 2.9% last month to 2.6% in January. Total earnings in January fell from $919.43 to $917.18. This misnomer about the hourly wage growth doesn’t mean the report was bad, but it means it wasn’t as perfect as some in the media made it out to be. The hourly wage growth always tells half the story about weekly earnings growth. It can be easily misunderstood by the financial media.

The other data point which is usually hotly discussed is the average hourly earnings growth for production and non-supervisory workers. This growth was only 2.4% showing that the wage gains went mostly to management and supervisors. Usually, the wage growth for the lower class and uneducated workers is the most volatile. It does the best relative to the educated upper class wage growth at the end of the business cycle.

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Let’s review the rest of the details of the report. The U6 unemployment rate, which measures those who are underemployed or part time workers seeking full time work, increased from 8.1% to 8.2%. I have been using this rate’s previous sharp decline in 2017 to explain why I think accelerated earnings growth will occur. It’s now up 0.2% from its recent bottom which is the exact opposite direction I expected it to go in. I still think it will fall; this is probably a blip on the radar. When it goes below 8%, there should be a pickup in weekly earnings growth. Household employment increased 409,000. However, the labor force participation rate remained stagnant at 62.7%.

As you can see in the chart below, the education and health services did the best as it added 38,000 jobs. As usual, the technology jobs decreased as it was down 6,000. The manufacturing industry added 15,000 jobs in January and 186,000 jobs in the past 12 months. This is in line with the ISM and Markit reports since this is about 500 jobs less than the previous 11 month average. Markit manufacturing report showed the employment index took a slight dip; the ISM manufacturing report had the employment index fall from 58.1 to 54.2.

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There were a couple of inconsistencies in the report. They might be something to ignore because month to month changes are volatile and this report is subject to 2 revisions. That being said, I’ll still mention them. The accountant hiring fell 10,000 jobs in January on a year over year, non-seasonally adjusted basis. The non-seasonally adjusted payrolls were the worst since at least 2008 which is off because the tax changes should lead to more accountant job creation. The chart below shows the layoffs in education were harsher than normal. This number is always negative on a non-seasonally adjusted basis in January because of the winter break. It’s off that it was so weak given the large increase in the healthcare care and education jobs in the seasonally adjusted report.

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It’s tough to measure the market’s reaction to this report because the stock market crashed due to the blow up in the volatility derivatives market. The increase in inflation expectations wasn’t a joke; the joke was that it caused the crash. Breakeven inflation was up from 2.11% to 2.14% on Friday. The rate is inching closer to the cycle high of 2.64%.

Conclusion

The labor report was solid again, but weekly earnings growth is still an issue. The report was pushed aside as the near term action in stocks gained headlines. This report shows us why a protracted bear market in 2018 is unlikely. The labor market and consumer spending are still strong. The market simply wiped away some of the excess speculation which caused it to go up in a straight line in January.