The U.S. Economy Kicks off 2018 with Another Healthy Job Gain

U.S. payrolls rose by 200k in January, meeting survey expectations for 190k. Gains were largely in the private-sector hiring (+196k). The unemployment rate remained unchanged at 4.1%.

All eyes were on wage growth in this report, and it didn’t disappoint. Average hourly earnings rose a relatively strong 0.3% in January and accelerated to 2.9% year-over-year. That marks the fastest pace of wage gains since 2009.

Payrolls gains were broad based. In the lead were construction (+36k), food services (+31k), health care (+21k) and manufacturing (+15k). Both goods-producing employment (+57k) and services employment (+139k) saw healthy growth.

The combined revisions to November and December, saw payrolls growth 24k lower than previous estimates. But job growth has still averaged 192k over the past three months, a very healthy pace.

January’s household survey incorporated updated population estimates. While the population, labor force, employment and unemployment were all revised up, the unemployment rate, and participation rate were unaffected.

The one negative in the report was a decline (-0.6%) in hours worked in January. This is not positive for economic growth, but we suspect it may have been affected by the brief government shutdown and/or the heavy winter storms that hit the Northeast early in the month.

Key Implications

There appears to be no stopping the U.S. labor market. With both jobs and wages beating expectations, there is little to criticize in this report. A better-than-expected print this morning has added to the pressure on the bond market, pushing the U.S. 10-year yield above the 2.8% mark.

As the labor market tightens, new jobs will increasingly be filled by workers (re-)entering the labor force. The labor force participation rate for core age workers (25-54 yrs) has made notable gains since 2015, but there is room for further improvement. Indeed, our economic forecast relies on further improvements in labor force participation in order to sustain job growth. Still, as this slack is absorbed, we expect monthly payrolls gains will slow over the course of 2018.

Stronger wage growth will help to draw workers back to the workforce. Indeed, January’s wage gain is just what the Fed is looking for, and helps to cement the case for a rate hike in March. That also puts the balance of risks toward more rate hikes over the course of the year.