US nonfarm payrolls increased by a disappointing 20,0001 jobs in February — markets had expected an increase of 180,000.2 Contributing to the disappointment was the performance of key sectors such as construction, leisure and hospitality, education and health services. We at Invesco Fixed Income do not put too much weight on a single payroll print (as emphasized in our January blog: Strong employment data may support Fed flexibility). Our research has shown that the longer-term employment trend has been a better predictor of economic growth.
Longer-term trend still strong
Recent US job gain trends remain healthy, with three- and six-month averages of 186,000 and 190,000 new jobs per month, respectively.1 Additionally, the government shutdown and inclement weather conditions likely added volatility to recent reports, further arguing for a careful focus on longer-term results. Based on the solid current trend, we continue to expect 2.5% to 3.0% growth in the first half of 2019. Our view is supported by the strong labor market, a confident consumer and continued benefits from tax stimulus.
The February jobs report also showed that average hourly earnings increased the most since 2009. While average hourly earnings are typically volatile, the February report is important because it demonstrates our view that wages are on the upswing in 2019. Furthermore, the unemployment rate fell to 3.8%, and the labor-force participation rate remained largely unchanged.1 In our opinion, there is less to glean from the headline payrolls number due to the noise created by the government shutdown and weather conditions. But we believe wages and unemployment are telling us that slack in the labor market is diminishing.
IFI outlook: The Fed and market implications
The January Federal Reserve (Fed) “relent,” in which the Fed signaled a willingness to be patient as it considered interest rate increases, significantly impacts the implications of February’s wage strength on monetary policy. While the Fed hasn’t officially shifted its stance on inflation, discussions around inflation symmetry have opened the door for the Fed to allow inflation to run “hot” for some time before rate hikes resume. Without these discussions, February’s higher wage print would have likely led to market pricing of further rate hikes this year. However, federal fund rate futures remained largely unchanged immediately after the report. We do not believe the February data will move the Fed from its dovish stance, but we are watching for a potential shift in the second half of the year. In particular, we are looking for higher wages and slowing growth in the latter half of 2019, which could put pressure on corporate profit margins and lead to increased market volatility.
In the near term, the February jobs report does not change our outlook for the Fed or credit markets. We at Invesco Fixed Income continue to expect the Fed to remain on hold for the next six months, which (along with solid growth) should support credit risk assets. On the margin, the February employment data should be positive for inflation-linked assets since we don’t see this reading influencing the Fed in the near term. Similarly, we believe the report will have little impact on the US dollar, which we continue to expect to be driven by global growth and policy developments.
1 Source: US Bureau of Labor Statistics, data from March 8, 2019
2 Source: Bloomberg, L.P., March 8, 2019
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Dovish refers to an economic outlook which generally supports low interest rates as a means of encouraging growth within the economy.
Inflation symmetry describes a requirement placed on a central bank to respond when inflation is too low as well as when inflation is too high.