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February 2, 2018 Blog 2 min read

Jobless rate holds at 4.1%; hourly earnings growth hits 2.9%.

Graph of nonfarm payrolls & unemployment rate - history

After a modestly disappointing December increase, job creation roared back in January.  The economy created 200,000 jobs during the month, with solid gains once again in goods-producing sectors, and stronger gains in the service sector.

The biggest change was in the retail sector, which shed nearly 26,000 jobs in December – not surprising from a seasonal perspective.  The greater surprise was the addition of 15,000 retail jobs in January, a sharp reversal in a short period. That net change of 41,000 for the month accounted for much of the overall increase in jobs created for the month.

The unemployment rate held steady at 4.1% for the fourth consecutive month – its lowest point in 17 years.

One of the more elusive elements of a strong jobs market in the current cycle has been a return to stronger wage growth.  That has been a positive for employers, allowing them to keep compensation costs in check, but a headwind to the consumer sector. In recent months, there have been signs that wage growth was heating up, but it hasn’t been as apparent in average hourly earnings.  That changed in January.  Average hourly earnings increased by 0.3% for the month, pushing the year-over-year increase to 2.9% -- its highest level since 2009. Tighter job market conditions are making the hiring process more challenging, and the war for talent is forcing employers to ante up to attract and retain workers.


Even as the economy struggled to grow faster than its 2% trend rate in recent years, job creation was a relative bright spot.  With overall growth accelerating and the expectation that tax cuts should provide some additional stimulus in the coming year, job market conditions should remain constructive, driving the unemployment rate lower in the coming months.


What does this all mean for investors? Inflation has already been edging toward the Fed’s 2% target, and stronger wage growth will introduce another source of inflationary pressure.  Policymakers have laid out a plan to continue to raise policy rates, and long-term rates have moved higher since the beginning of the year. 


That upward movement in yields have weighed on bond prices in recent weeks, but has also contributed to the uptick in volatility in equity markets of late. That could continue, although the economy appears to be far from any meaningful risk of recession, which would be the primary concern for equity investors. In the meantime, a return to greater volatility after a year of unusually placid markets shouldn’t be surprising.  The good news is that volatility doesn’t signal an end to a bull market, particularly with the global economy gathering momentum, fiscal policy providing a boost, and monetary policy still accommodative – even with rates edging higher.



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