A picture perfect jobs report

March 10, 2017— The February jobs report was ideal in terms of an indication of ongoing labor market strength, stronger economic growth, and bolstering the case for rate hikes from the Federal Reserve. Headline job growth of 235,000 was a bit above market expectations and essentially the same as January’s upwardly revised 238,000. The unemployment rate ticked down one-tenth to 4.7% indicating increasing labor market tightness. This occurred despite strong labor force growth for the month. Importantly for the Fed, wage growth bounced back, hitting 2.8% in this report and confirming our assessment that last month’s dip to 2.5% was a statistical blip and not indicative of a true weakening of wage pressure.

As shown in the first chart below, job growth continues to be stronger in year-over-year terms than labor force growth. That high demand for increasingly hard to find workers is pushing the unemployment rate down and driving up wages (as shown in the second chart). Unless there is a meaningful boost to labor force participation, we expect the labor market to continue to tighten and put upward pressure on wages. Wage growth is not excessively strong yet, but it is pushing in the right direction after years of hovering around 2%. This is giving workers their first increases in real wage growth (i.e. net of inflation) of this economic recovery. This tightening labor market and wage growth are exactly what the Fed needed to see on the employment side of their mandate to be confident about rate hikes.

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Source: Bureau of Labor Statistics

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Source: Bureau of Labor Statistics, WTIA

Other positive signs in the labor market that we note are:

  • There were 28,000 manufacturing jobs added, marking the third straight month of gains following a mostly downward trend in 2016. This is consistent with other positive indications for the sector including an upswing in both new orders for manufactured goods and the ISM manufacturing index.
  • The number of people reporting working “part-time for economic reasons” (meaning they’d rather have full-time work) continues to trend downward. That metric is down by 315,000 from a year ago, which stood at 6 million people.
  • The number of people who are long-term unemployed, more than 15 weeks, moved down for the month and is down by nearly 500,000 from the 3 million people it stood at a year ago.

Core narrative

The employment report is very supportive of our core narrative of a strengthening domestic economy and expectations of rate hikes. We expect job growth to slow a bit in coming months as the weather impact from a mild February gives back a bit in future reports and because in our view there is not enough labor force growth to maintain growth above 200,000. This is likely to lead to stronger wage pressure and multiple rate hikes from the Federal Reserve this year. The strengthening economy and prospect of higher interest rates is supportive of our portfolio positioning of an overweight to risk assets and underweight to core fixed income.

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