March 8, 2019— The February jobs report was just plain awful. With a Bloomberg median expectation of 180,000 jobs added, and our own higher expectation of 200,000, the shockingly low figure of just 20,000 had many of us thinking we were looking at a typo. Along with some other weak data on retail sales and business spending, the weak jobs figure will certainly drive discussions of whether we are coming up on the end of the expansion. We think the jobs figure is reason enough to be cautious, but do not take it as the proverbial nail in the coffin of this cycle. We remain overweight to risk, including U.S. Large Cap Equities, but are watching closely for any other warning signs.

Oh so low

Job growth was weak across the board in all sectors, and with a decline of 32,000 jobs in the construction sector. Other sectors remained in positive territory but with sharply slower job additions except for one: professional and business services. Slightly more encouraging was the “household survey” side of the report (the jobs report is derived from two separate surveys, one that surveys businesses and the other surveys households). The household survey gives us estimates of the unemployment rate, which dropped from 4.0% in January back down to 3.8%.

As can be seen in Figure 1, the weak figure follows two very strong months of gains, so some of the weakness was likely “give back” for gains that were artificially high in December and January. When you know you have statistical volatility, it’s good to look at moving averages, and the 3-month average is 186,000 per month with this report, which is still very strong. It’s also worth noting several items that may have thrown off the February figure, including a large winter storm on the East Coast during the “reference week” (the week of the month when the data is gathered). The reference week also coincided with the end of the longest government shutdown in history. We also note in Figure 1 that this is not the first time we’ve had an aberration during this recovery. It happened twice before and both instances proved to be anomalies.

Figure 1: U.S. job growth (thousands)

 

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Source: Bureau of Labor Statistics. Data as of February 28, 2019.

Wages keep rising

One major item in the report that was not a surprise was a continued upward push in wages. Firms continue to struggle to find workers in an expanding economy and multi-decade lows for the unemployment rate. Average hourly earnings pushed up to a new cycle high of 3.4% year-over-year, shown in Figure 2. Higher wages typically draw the attention of Federal Reserve officials who fret about inflation, and by extension investors watch wages closely too. But in this cycle we have yet to see the wage gains push through to higher inflation. As we note in our 2019 Capital Markets Forecast (CMF), we think productivity gains are helping firms to deal with higher labor costs without raising prices very quickly. This means the Fed can continue with its new “patient” stance until inflation actually shows up in a meaningful way. That patience is helpful to equities and other risk assets.

Figure 2: Average hourly earnings (Y/Y%)

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Source: Bureau of Labor Statistics. Data as of February 28, 2019.

Core narrative

The jobs report for February was shockingly low and a significant disappointment. That said, there are more reasons to believe this is a blip than there are to believe it is signaling a downturn for the heretofore strong labor market. The unemployment rate moved down a bit and wages moved up. Importantly, the wage growth is not enough to pull the Fed out of its patient stance, and that will be supportive to equities. We don’t want to be accused of whistling past the graveyard, but we continue to believe the economy is on a strong footing, and that includes the labor market. We are watching closely for more signs to the contrary.

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