Friday’s jobs report was another dose of good news for the U.S. economy. While most indicators had already pointed towards a positive report, the numbers came in stronger than expected, with some important implications for Federal Reserve policy.
The economy added 257,000 nonfarm payroll jobs in January; taking November and December into account as well, the U.S. has added about one million jobs over the past three months, and the pace is accelerating. Combined with strong gross domestic product figures, the jobs report suggests the U.S. economy is on pretty solid footing.
Some key takeaways:
- It’s worth noting that the gain in January once again is considerably better than the 200,000-per-month average level of jobs growth typical of past periods of economic expansion. Moreover, the 12-month average nonfarm payroll gain of 264,000 is higher than the peak seen during the pre-crisis housing boom period, and the 6-month, and 3-month moving average nonfarm payroll gains of 282,000, and 336,000, respectively, illustrate how far we have come in improving labor market conditions.
- With the economic strength we’re seeing, why is the Fed still at the zero bound? One key reason is that despite strong overall employment, we are still seeing a great deal of softness in the “underemployment” number. A major challenge for the economy is that we are facing a major structural challenge in the economy. Skilled workers are finding employment (and improving wage gains), but lower-skilled workers (and those with less education) are either being replaced by technology or are witnessing only anemic wage gains.
- The other reason that the Fed has held rates steady at zero is that the economy has been running well below the Fed’s inflation expectations—which has made wage growth a key data point for the FOMC’s deliberations. Wage growth has been an ongoing point of weakness despite strong economic growth, but fortunately, we saw encouraging improvement in wage growth in the January report. Wage growth came in above consensus expectations at 0.5%, along with a positive revision of the December numbers. In fact, year-over-year average hourly earnings increased significantly to +2.2% from a previously reported +1.7%.
The combination of continued resilient (albeit moderate) GDP growth, and accelerating wage gains, should be sufficient to motivate the Fed to move short-term interest rates off zero later this year. These estimates are supported by BlackRock’s “Yellen Index,” our own metric of labor market/economic change as related to monetary policy reaction functions.
The index continues to remain firmly in positive territory, indicating the readiness of the economy for a policy move (see graph). In fact, the preliminary read on the Yellen Index improved from +0.54 to +0.65 with revisions.
Furthermore, momentum remains in positive territory and the level of the index is consistent with substantially reduced labor market slack. Indeed, the Index is consistent with a Fed that can raise rates in June.
Wage and employment data from U.S. Bureau of Labor Statistics.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.