Economic Update – January Jobs Report

The labor market began 2017 with mixed results, with positive results coming in the top line number as the U.S. economy created 227,000 jobs for the month. This was well above the consensus estimate of 174,000 jobs, although data for prior months were revised lower by a total of 39,000 jobs mainly due to November’s figures revised lower by 40k jobs.  The unemployment rate rose again, as it went from 4.7 to 4.8% that was due to more workers entering the workforce with the participation rate increasing for the second consecutive month.  With the uptick in the participation rate, the total measure of unemployment (the U6 rate) rose to 9.4%.  Job gains for the month were driven entirely by the private sector, which created 237,000 jobs while the government workforce was reduced by 10,000 jobs.

Wage gains disappointed for the month, as wages were revised lower in December and came in with a 0.1% growth in January, which is approximately 2.5% higher than wages in January 2016.  Economists expected wages to increase 0.3% for the month, which was the weakest growth seen in two years.   As we have mentioned before, this will continue to be an important variable for market watchers and the Federal Reserve, given the reliance on consumer spending for GDP growth, as any stagnation or sustained decline may foreshadow an economic slowdown and/or pause in rate hikes from the Fed.

Given the lower than expected wage growth, and below consensus initial estimate of Fourth Quarter 2016 GDP, the probability remains low for a March rate hike.  Still, we believe the economy will continue to strengthen as we head into 2017 supported by current fundamentals and the potential for de-regulation and reduced corporate tax rates.  Therefore, we expect the Federal Reserve will continue to raise interest rates on a gradual basis as we move through 2017.