The January Jobs Report Does Not Ensure A March Rate Hike

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Includes: RINF
by: Danielle DiMartino Booth

Click to enlargeInvestors should be alarmed by what the Fed will miss in the most recent slew of data on the state of the U.S. labor market. By the same token, they should be reassured that there is another payroll report ahead of the March Federal Open Market Committee meeting.

What messages will the Fed glean? Their in-house economists' metrics will tell them that consumer spending will pick up in the months to come to take care of full-time job creation and accelerating wage gains. Indeed, wage growth last year was the briskest since July 2009 and January's outsized 0.5-percent gain gives credence to those who've been warning about growing paychecks.

Expect the Fed to disregard the slide in job creation and conclude that a one-month aberration can be dismissed, as one month never makes a trend. In fact, when you average the gains, the trend in payroll growth is accelerating: the three-month average is 222,000, which outpaces the six-month average of 212,000, which in turn bests the 12-month average of 214,000.

The most encouraging aspect of the report, bar none, was the age cohort responsible for the decline in the unemployment rate to an eight-year low of 4.9 percent. The Lindsey Group's Peter Boockvar points out that the bulk of the gains in the household report came from those ages 25-54 years old.

"In this ripe-age-for-working category, 607,000 more got jobs while there was little change for those aged 16-24 and over the age of 55, in sharp contrast to the prior month and in this cycle," Boockvar noted.

So the increase in the labor force participation rate and wages, coupled with the decline in the unemployment rate and no disaster in average gains will probably be where the narrative ends for Fed policymakers. Janet Yellen is sure to applaud the improvement in the jobs market when she testifies to Congress next week. Expect speech after speech to echo this merry sentiment in the weeks to come, putting investors further on edge.

What should the Fed incorporate into its analysis?

The first fly in the ointment is that all of the recent averages represent a marked deceleration from 2014's average monthly gains of 260,000. The second is that December's gains were revised downwards bringing the last two-month average to 206,500.

More to the point is the havoc wreaked over the last two months by seasonal adjustments that have been whipsawed due to weather-related quirks. ITG's Steve Blitz is astute in recognizing that January's data are more a portrayal of "a working out of fourth quarter payroll additions which were, in our view, more a product of statistical methods than actual hiring." In his estimation, statistical offsets are responsible for 91 percent of January private sector gains being at retailers, restaurants and health care providers.

The 58,000 gain in retail jobs looks particularly suspect given the most recent layoff announcement data from Challenger, Gray & Christmas. In January, retailers announced 22,246 job cuts, the highest January total since 2009. Maybe those commitments to front run any increase in the minimum wage aren't all they're stacked up to be when households' budgets continue to be squeezed by rising rents and healthcare costs.

In all, some 75,114 job cuts were announced across all industries last month, a 218-percent jump from December and a 42-percent increase from the same month last year.

As for Chair Yellen's best laid plans that the damage from the energy industry downturn will be "transitory," January also marked the return of heavy jobs cuts in the energy industry. Firms announced 20,246 layoffs - the highest month on record since oil prices began to decline in mid-2014.

Looking ahead, default scares will morph to actual bankruptcies in the months to come. In other words, there are more high-paying job losses building in the oil pipeline, not fewer. Is it any wonder households' expectations for a higher unemployment rate in one year's time is at the highest level since September 2014 according to the January University of Michigan survey?

The biggest elephant in the room, though, the one that Fed officials are the most likely to ignore, is how skittish the average C-suite occupant has become since ringing in the New Year. Market volatility and signs that black swan events such as a major European banking scare or a South American sovereign debt default are very much in their sights.

One of the least appreciated and best data sets around, though, are usually buried in the bottom of the Challenger report, that of announced hiring plans. Last year, companies announced 690,751 planned openings, down materially 821,506 in 2014.

All things considered, the trend toward less hiring and more firing should continue on its downward path. Sufficient time should have passed for evidence of this to be apparent in the February jobs report just in time to place Fed officials on hold. Until then, expect the volatility in the markets to continue and be further exacerbated every time a Fed official opens their mouth.