Positive Start to 2017, But Jobs Data Didn’t Add Up

U.S. economic data at the start of the first quarter is positive and consistent with real GDP growth in the neighborhood of 2.0-2.5 percent. Job growth in January was better than expected as 227,000 net new payroll jobs were added to the U.S. economy. However, even with the strong payroll gains, the details underneath the headline in the January jobs report were mixed. The household survey of employment was significantly weaker than the payroll survey, showing a net loss of 30,000 jobs in January. The household survey often diverges from the payroll survey for a month or two but is fairly consistent over the long term. Given the fact that the household survey has been weaker than the payroll survey for the last four months, it looks like there is potential for a snapback in the household survey soon. The opposite view is that the household survey is picking up weakness that the payroll survey is not. If this was corroborated by other economic data, we would give the pessimistic view more weight; however, most other labor market metrics are good.

Total (continuing) claims for unemployment insurance through mid-January remain at exceptionally low levels, not seen since the 1970s. Moreover, if we scale UI claims to the size of the labor force, that ratio is the lowest it has been since 1969. Also, both the national-level ISM Manufacturing and Non-Manufacturing Indexes have employment components. In both of these surveys, the January employment sub-indexes were above 50 and increasing, meaning that more companies plan to keep hiring.

Also, the count of the labor force, which is part of the household survey, has been weak for the last four months. This has allowed the unemployment rate to tick up from 4.6 percent in November, to 4.7 percent in December, to 4.8 percent in January. We described both the December and January gains in the unemployment rate as inconsequential, but we recognize that a series of inconsequential gains eventually becomes consequential. We expect the household survey to reset over February and March, bringing the unemployment rate back down.

Another weaker-than-expected component of the January jobs report was the measly 0.1 percent gain in average hourly earnings. This is important because the Federal Reserve is watching wage and inflation indicators carefully, in order to calibrate their monetary tightening cycle. If productivity growth (output per hour per employee) is strong, then wage growth does not squeeze corporate profits, and so it is not inflationary. However, recent productivity growth has been sluggish, up just 1.0 percent year-over-year in 2016Q4. Other measures of wage growth are hotter than average hourly earnings, as reported by the Bureau of Labor Statistics. The Federal Reserve Bank of Atlanta’s wage growth tracker was up 3.5 percent year-over-year in December. This may be inflationary with today’s low productivity gains.

So what does the Fed do with this jumble of data? …Nothing. We expect the Federal Reserve to remain in watch-and-wait mode at the next FOMC meeting over March 14/15. We still look for the next increase in short-term interest rates to come on June 14. If the Fed wants to increase interest raise rates before June, they will need to prepare financial markets by firming up their forward guidance. They did not take the opportunity to clarify their guidance in the February 1 policy announcement.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: US_Economic_Outlook_0217.

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