February Jobs Report
The labor market picked up in the first full month of the new administration. Economists expected an increase of 197,000 jobs for the month, while the Department of Labor reported an increase of 235,000 jobs. Gains were seen across most categories, with retail suffering the only decline for the month. The construction sector experienced a large gain for the month due to unseasonably warm weather. Still, this gain helped unemployment rate decline to 4.7% and more importantly, the participation rate rose for the month to 63% which is the highest level in a year. Although more people entered the workforce this past month, as evidenced by an increase in the participation rate, the total measure of unemployment (the U6 rate) fell to 9.2%. This means the economy was able to digest more workers entering the workforce, which is a positive sign. Furthermore, revisions for December and January added another 9,000 jobs which brought the three month average up from 183,000 to 209,000 jobs. The private sector continues to drive job gains, with confidence levels increasing across both the corporate and individual landscape.
As we have discussed, wages are in important variable when trying to determine the Federal Reserve’s next move. Wage gains came in slightly below expectations for the month, with a rise of 0.2% versus expectation of 0.3% gain. However, year-over-year gains ticked up from 2.5% last month to nearly 3% this month. Two weeks ago, market expectations of a March rate hike averaged around 30%. However, recent comments from the San Francisco and New York Fed Presidents and Janet Yellen coupled with strong economic data now price in an almost certain rate hike when the Federal Reserve meets next week.
Market expectations have now moved in line with the Federal Reserve’s forecast for at least three increases in their benchmark rate in 2017. Continued strength in the economic data is supportive of higher interest rates to combat inflation. The yield on the Ten-Year Treasury Bond has increased within the last week to 2.6%, while the overall yield curve has steepened which is positive economic indicator. 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.