What are Jobs Telling Us?

The US added 235,000 jobs in February, nearly 20% more than expected by economists. Unemployment fell to 4.7%, even as the number of Americans rejoining the workforce, measured by the labor participation rate, increased.

Wages are rising, as a result of a tightening labor market. The average hourly earnings for private-sector workers rose 0.2% in February from January and increased 2.8% from a year earlier.

These indicators argue in favor of Fed rate hike next week. In fact, this morning’s WSJ notes that futures are pricing in a 93% chance of a move at next week’s policy-setting meeting, compared to 88.6% yesterday, as tracked by the CME Group.

Treasury yields have been rising steadily the last week in anticipation of a stronger jobs number. Bond prices move in the opposite direction of yields. Since peaking at $106.08 last Friday, our 7-10 year US Treasury Index (IEF) has fallen 2.2%. It bounced today, along with other Treasury indicators.

Before we get too far ahead of ourselves, let’s recognize that the wage gains mentioned above do not appear yet to be inflationary. Paul Vigna (WSJ) points out that the 2.8% wage hike reported today is not as threatening as it first appears. Some 80% of the workforce saw their hourly pay increase by 2.48%, not the 2.8% or more the bosses got, and flat when adjusted for inflation in 2016 of 2.5%.

Michael Derby poses the question, ‘how big do job gains need to get for a hot jobs market?’ Referencing the Atlanta job calculator, it would take a sustained average monthly gain of 224,000 jobs to reach a jobless rate of 4% in a year; a level not seen since the days of the bursting tech bubble in late 2000.

As the market opens, investors are taking the jobs report as good news for both stocks, bonds, and the economy. Treasurys (IEF) are up .2% and stocks are up .3% (VTI and S&P 500). Emerging markets are also rallying. Taken together, these indicators suggest investors are not too worried that the Fed is going to tighten overly aggressively this year, potentially choking a still fragile economic recovery.

The Fed’s challenge will be to avoid falling behind an accelerating economy, should we be witnessing a true breakout. If promises from the administration and Congress of tax and regulatory rollbacks as well as significant infrastructure spending are delivered, markets are likely at appropriate levels and the Federal Reserve is in for the challenge of its lifetime to unwind its balance sheet fast enough to keep a lid on inflation.

Every bit of this Brief so far references events and outcomes that cannot be predicted or controlled with any level of confidence. We at Beacon are in the planning, not the economic forecasting business. As a matter of fact, someone once famously said, if you laid all the economists in the world end to end . . . it wouldn’t necessarily be a bad thing.

Planning, not forecasting is where opportunities and threats are discovered and realized. Questions regarding appropriate levels of risk (too much or too little), increasing savings should taxes or health expenses be reduced, or starting that new business in an improving regulatory climate, all are things we can and should be talking about and executing on so that, when a better or a worse economy rolls out, you are positioned to achieve maximum advantage during the ups while minimizing, to the extent possible, the downs.