Weekly Market Commentary by Chief Economist Scott J. Brown, Ph.D.
Two practice areas 280 combined years of practice


Economic Monitor – Weekly Commentary
by Scott J. Brown, Ph.D.

Job Market Constraints / Powell Preview

February 7, 2020

The January Employment Report remained consistent with the broader range of labor market indicators. Job conditions are tight. Wage growth has picked up relative to a few years ago, but is not particularly high by historical standards. Thus, the Fed is widely expected to keep short-term interest rates steady in the near term. In this week’s congressional testimony, investors will want to hear Fed Chair Powell’s assessment of the coronavirus, but he will also discuss the balance sheet and money market support efforts – neither of which is quantitative easing (QE).

Prior to seasonal adjustment, nonfarm payrolls fell by 2.83 million in January, which translates into a 225,000 seasonally adjusted gain (reported accurate to ±110,000). Hiring for the 2020 census added 5,000, with a lot more to come in the next few months, although it’s unclear how successful the government will be in finding workers. Annual benchmark revisions lowered the March 2019 level of payrolls by 514,000 (-0.3%), about as expected, pushing down the monthly pace of job growth in 2018 (to +193,000 from +223,000). With this revision, job growth appears to be more clearly trending lower. This has little to do with who’s in the White House or running Congress and more to do with the population dynamics. A long-term sustainable pace of job growth is well under 100,000 per month. We can run ahead of that now as slack is taken up, but job growth should continue to trend lower in the months ahead.

Meanwhile, wage growth remains moderate. Average hourly earnings rose 0.2% in January, up 3.1% year-over-year. The Fed’s approach has shifted over the last year. Instead of activing preemptively (tightening before inflation actually appears), many Fed officials are more willing to wait for inflation to begin to pick up. We should get some clarity on this framework in Fed Chair Powell’s monetary policy testimony. While the economic impact of the coronavirus remains uncertain and is a potential wildcard for monetary policy, no change in short-term interest rates for the time being.

Financial market participants may be more interested in what Powell has to say about the balance sheet and liquidity support for the money market. Yet, we already know. In the Monetary Policy Report to the Congress, released on Friday, the Fed noted that “the size of the balance sheet has been expanding to provide an ample level of reserves to ensure that the federal funds rate trades within the FOMC's target range.” Following the volatility in money market funding in mid-September, the Fed has been conducting repo operations and Treasury bill purchases in order to maintain ample reserve balances over time. While the balance sheet has expanded to maintain ample reserves, “these operations are purely technical measures to support the effective implementation of the FOMC's monetary policy, are not intended to change the stance of monetary policy, and reflect the Committee's intention to implement monetary policy in a regime with an ample supply of reserves.”

The problem is that stock market participants have generally viewed the Fed’s efforts as quantitative easing or its equivalent – that is, taken as a signal to buy. That may prove to be problematic when the Fed pulls back. The Fed will continue its support for the money market through the April tax season. It is currently in the process of refining its monetary policy strategies, but a formal statement isn’t expected until the middle of the year. (M20-2944301)

Data Recap – As a rule, one should take January economic data with a grain of salt. Nonfarm payrolls rose more than anticipated in January (on a seasonally adjusted basis). Benchmark revisions lowered the estimate of 2018 job growth. The ISM surveys were better than forecasted, with the manufacturing index moving above the breakeven level for the first time since July.

In its semiannual Monetary Report to Congress, the Fed repeated that balance sheet expansion is to ensure an adequate level of reserves and that efforts to support the money market are “purely technical measures” (that is, NOT QE).

The January Employment Report was strong. Nonfarm payrolls were reported to have risen by 225,000 (down 2.83 million before seasonal adjustment). Benchmark revisions lowered the March 2019 level of payrolls by 514,000 (-0.3%), about as expected – pushing the monthly pace of job growth in 2018 from +223,000 to +193,000). Average hourly earnings rose 0.2% (+3.1% y/y), failing to reflect state minimum wage increases. The unemployment rate edged up to 3.6%, reflecting an increase in labor force participation (don’t read much into that, population adjustments add noise every January).

The ADP Estimate of private-sector payrolls rose by 291,000 in January, leaving the three-month average at 204,000.

Unit Motor Vehicle Sales were little changed in January, at a 16.8 million seasonally adjusted annual rate, vs. 16.7 million in December. Note that sales fell 25.3% prior to seasonal adjustment.

Factory Orders rose 1.8% in December (-0.4% y/y), reflecting a sharp rebound in defense aircraft (up 168.3%, after falling 69.1% in November). Civilian aircraft orders tumbled 74.7% (-88.8% y/y). Orders for nondefense capital goods ex-aircraft fell 0.8%, with shipments down 0.3%.

Nonfarm Productivity rose at a 1.4% annual rate in the preliminary estimate for 4Q19 (+1.8% y/y). Unit Labor Costs rose at a 1.4% pace (+2.4% y/ y). In manufacturing, output per worker fell at a 1.2% annual rate (-0.7% y/y), with unit labor costs up 5.9% (+5.3% y/y). Manufacturing productivity growth was strong in the 1990s and 2000s, but has been weak in recent years.

The ISM Manufacturing Index.

The ISM Non-Manufacturing Index rose to 55.5 in January, vs. 54.9 in December and 53.9 in November. Growth in business activity and new orders picked up, although employment growth slowed. Survey respondents remained mostly positive about business conditions and the overall economy, but continued to have difficulty finding qualified workers.

The U.S. Trade Deficit widened to $48.9 billion in December (vs. $43.7 billion in November), but fell in 2019 (a $616.8 billion shortfall, vs. $627.7 billion in 2018). It appears that trade policy uncertainty led to stockpiling of inventories of imported goods in 2018.

Jobless Claims fell to 202,000 in the final week of February, leaving the four-week average at 211,750. The seasonal peak in unadjusted claims was smaller this year, consistent with a tightening job market.

The Challenger Job-Cut Report showed that announced layoff intentions totaled 67,735 in January, vs. 32,843 in December and 52,843 a year ago (these data are not seasonally adjusted). Job cut announcements were led by technology companies, retailers, and industrial goods manufacturers.


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