Nonfarm payrolls rose by a strong 227k in January, beating expectations (consensus: 180K, TD: 175k).
· Levels of slack broadly inched higher in January but for good reasons, as a slightly higher unemployment rate (4.78% vs 4.72%) was accompanied by a rise in labor force participation.
· Average hourly earnings disappointed, rising a modest 0.1% m/m despite minimum wage hikes and benign seasonal distortions. Wage growth slipped back to 2.5% y/y as a result from a downwardly revised cycle high of 2.8% y/y.
· Overall, this report is consistent with a labor market that is near full employment, which should support continued gradual increases in wages. Thus it keeps the Fed on track to hike later this year – we expect the next hike in June – but should reduce market expectations for a hike in March. We expect the Fed will wait to see further cumulative evidence of wage and price pressures.
Nonfarm payrolls rose 227k in December, achieving a pace well above the breakeven rate needed for further declines in slack. Though the annual benchmark revisions were minor (with a -0.1% change in the level of March nonfarm payroll employment), net revisions over the past three months were negative (-49k). That left the 12-month average pace at a healthy 195k vs 187k in December. The goods-producing sector had a strong showing of +45k jobs in January, led by a sharp increase in construction and small gains in manufacturing. Private services accelerated to a 192k monthly gain, up from 150k in December, with increases widely spread across industries. Government jobs contracted for the fourth straight month.
The unemployment rate inched 0.06pp higher to 4.8% alongside a 0.2pp increase in the labor force participation rate. Looking at broader measures of slack, the U6 rate arrested its past declines and rose to 9.4% from 9.2%, as involuntary part-time employment bounced back following two hefty drops in the prior two months. The number and share of unemployed workers also moved a touch higher after hitting new lows in December, consistent with rising participation.
Average hourly earnings surprised to the downside in January, recording only a 0.1% m/m increase. That led to a step down in the pace of earnings growth to 2.5% y/y from its cycle high of 2.8% y/y (revised) in December. A stronger increase had been expected based on minimum wage hikes across 19 states while statistical distortions implied neither an upside or downside bias. By industry, however, the weakness was not broad-based. Goods-producing were relatively strong (+0.2% m/m) while private services underperformed (+0.1% m/m), though the weak print in the latter was heavily influenced by a 1.0% drop in the financial activities category. Trade jobs, which are more exposed to minimum wage changes, saw wage gains of 0.3% m/m. Overall, the downside miss in January is not a concern in our view. For one, there have been measureable minimum wage increases each of the past two years, which now may better captured in the seasonal corrections. Furthermore, wage growth remains on an upward path despite a step down in January as above-trend job growth remains sustained to put further downward pressure on slack. Finally, the 2.8% spike in December was likely unsustainable. More steady wage growth is the trend.