The Bureau of Labor Statistics released the monthly jobs report this morning. The headline numbers blew away expectations. Non-farm payroll employment increased by 243,000 in January compared to estimates of 140,000. The unemployment rate came in at 8.3%, 0.2% better than expectations. The big upside surprise in January’s employment numbers is likely related to the Labor Department’s annual benchmark survey and population adjustments, but there is no denying the positive trend in the labor market. Over the last three months, non-farm payrolls have increased by an average of 200,000, while the average gain in household employment has been an impressive 446,000. Over the last six months, the unemployment rate fell by 0.8 percentage points–that matches the fastest decline in the unemployment rate since the recovery began. From a cyclical perspective, the employment picture looks bright, but structural problems remain.
While the reported unemployment rate is improving, the labor force participation rate continues to plunge, exposing a weak structural underbelly to the labor market. Is unemployment really falling or are discouraged workers just dropping out of the labor force? The number of long-term unemployed also remains near record highs and now accounts for 43% of the total unemployed. The average length of unemployment is also at a record high at more than 40 weeks—double the prior peak reached during the early 1980s recession. A lower labor force participation rate and higher structural unemployment point toward a slower potential growth rate in the economy.
Today’s stronger than expected improvement in the employment numbers is undeniably bullish for the economy, but is it as bullish for stocks as today’s 150 point rise in the Dow implies? Stock markets have already priced in ultra-loose monetary policy for another three years and a third round of money printing from the Fed. If the U.S. economy continues to gain cyclical momentum there is a risk that the Fed could pull away the punch bowl sooner than stock investors expect. I’m not making a forecast here. With Dr. Bernanke at the helm of the Federal Reserve, monetary policy is more likely to err on the side of continued financial distortion and asset bubbles than it is sound money, but a more hawkish (or less accommodative) Fed is a risk worthy of your consideration.
Jeremy Jones, CFA
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