Abacus: High Job Growth Excites Labor And Cools Markets

A flurry of exciting news came with the start of March. The annual buzz around the Oscars had many viewers tuning in to see the outcomes of 90th Academy Awards. Film aficionados will also be excited for the release of Ready Player One, critically acclaimed director Steven Spielberg's first movie of 2018 to be released later this month. But perhaps the most exciting release to consumers alike is the Bureau of Labor Statistics jobs report for February. Whether you are a worker or an investor, the recent BLS report holds positive news for everyone in the markets.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

The unemployment rate held steady at 4.1 percent for the fifth month in a row, which is the longest consistency the unemployment rate has had since July 2012 and its lowest rate in almost eighteen years. The number of unemployed persons was also left unchanged at 6.7 million, with a similar incremental change occurring in the nation’s population. The unemployment rates for other demographics, however, have experienced more twists separate from that of the overall economy.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

The unemployment rate for 25-year-olds and older with at least a bachelor’s degree rose to 2.3 percent, ending its three-month streak of a low 2.1 percent unemployment rate. However, this is still better in comparison to a year ago when the rate for this demographic went back and forth between 2.4 and 2.5 percent.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

In lighter news, the gap between the unemployment rates for men and women ages 20 and above has decreased. These demographics that include younger millennials now differ by only 0.1 percent, just as it had in previous months before January’s 0.3 percent difference. However, the data also revealed that men ages 20 and up had a lower unemployment rate then women, 3.7 and 3.8 percent respectively. Although women of this demographic have a larger population than men, they also have a larger number of people not in the labor force – close to 19 million more.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

Despite these fluctuations, the civilian labor force has continued to grow for a duration parallel to that of the steady unemployment rate. As such, the participation rate has risen to 63 percent after remaining unchanged at 62.7 percent since October of last year. This is also the first time since April 2010 that the participation rate has increased by this much within a month. The reason for the increased participation could be heavily influenced by a more positive outlook on the labor market based on recent economic growth.

According to the BLS report, 313,000 jobs were added to the labor market overall in February. This outpaced the amounts predicted by the Automatic Data Processing Inc and other economists, who each estimated a job increase within the lower 200,000s range. The increase reported by the BLS is the largest monthly growth to happen since July 2016. The job growth also showed a continued upward trend for the construction and manufacturing industries, with the one-month net change in education and health care services dropping to 23,000. This is the industry’s lowest since November of last year and has thus ended its trend of growth.

 Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

In the construction industry, 61,000 jobs were added in February with two-fifths of this growth happening in contractor jobs – as is the norm in the construction industry. Manufacturers saw a 31,000-net growth in jobs due to a 1,000-job decrease in nondurable goods and a 32,000 growth in durable goods. Among durable goods, manufacturing of primary metals increased by 3,700 jobs. This would be of interest to laborers in the manufacturing industry who are carefully anticipating the effects of the recent tariffs on steel and aluminum imports signed into law earlier in March.

Yet, the manufacturing industry wasn’t alone in job losses. The information industry was the only sector to experience an overall loss in jobs, 12,000 in total. Interestingly, the bulk of this loss occurred in the motion pictures and sound recording industries, with a total loss of 9,700 jobs. Perhaps no matter how successful a movie is, it doesn’t necessitate a steady flow of work for the people working behind the camera.

In a turn of events, the professional and business services industry came in ahead of manufacturing in the trend of upward growth, maintaining growth since December 2017 and adding 50,000 jobs to the industry in February. Additionally, the retail trade industry also experienced a surprising growth of 50,300 additional jobs. This is the largest one-month net change the industry has had in two years.

However, wage growth did not have as much success as job growth did. Compared to last year, the average and weekly earnings for much of the work force increased by 2.5 and 3.1 percent respectively. This low growth is seen in the miniscule difference in wages from last month, with hourly earnings increasing by seven cents to $22.40 and weekly earnings increasing by less than seven dollars to $757.12. While this may disappoint job seekers, it comes as great news to investors who last month were spoked by signs of inflation seen in wage growth expectations.

Although the Federal Reserve has been reporting that the economy is at full employment and wage growth is expected to take off, Minneapolis Fed President Neel Kashkari provided an interesting analysis that challenges that view. After posting an interesting tweet that added a comical -er suffix to “maximumer employment,” Kashkari insinuated that we cannot yet claim we are at full employment.

As discussed earlier, job growth exceeded expectations and with it the participation rate grew. If the economy were at full employment, both areas would either decrease or remain stagnate to demonstrate an overall slowdown in employment growth. Similarly, the wage growth would have jumped by a larger rate than it in February to show that employers are trying to maintain their workers in the face of a tight labor market. Therefore, based on the BLS job report, the labor market still has room to grow and hence wages will grow slower than previously expected.

The reason investors feared a spur in wage growth is because of the notion that increased wages push inflation higher. When wages increase, there is a causal increase in the prices of goods and services for businesses to maintain their profits. Now that the evidence provided by the BLS shows wages have cooled with the larger than average growth in jobs, the Fed will proceed with their planned interest rate increases at a gradual pace. Without the fear of aggressive interest rate hikes, the stock market is fairing much better and showed improvement as soon as the jobs report was released.

Although wages didn’t climb as high as expected, it doesn’t mean wage growth will remain slow. As the unemployment rate remains strong at 4.1 percent, there is still the possibility that the labor market will tighten to a point where wages will have to increase faster. To stay ahead of any volatility the markets may experience with concerns over the rise of inflation, you can follow the BLS monthly news releases on the consumer price index as it’s the Fed’s main indication of the inflation rate. Along with that, always make sure to stay up to date with the latest analysis on the markets.