The economy began the year with a strong pace of growth in the labor market, generating 225,000 jobs, point to modest activity ahead. That activity will be affected by the ability of the U.S. consumer to offset weak domestic manufacturing and the potential ripple effects of the coronavirus outbreak in China.
The report suggests that the Fed has ample room to hold its policy rate between 1.5% and 1.75%
Prime aged employment for women ages 25 to 54 increased to a cyclical high of 77%, and men in that cohort improved to 89.3%, both of which illustrate why the underlying domestic economy will simply move past the current economic challenges, albeit at a slower pace in the first quarter of 2020.
The labor market data inside the January employment report should not change the direction of monetary policy. But it is clear that central bankers will closely monitor the potentially large exogenous shock of the virus outbreak through the trade channel.
The Fed will need to ascertain both the size of the shock and if it affects the real economy through a slower pace of hiring in the trade, transport and manufacturing categories as well as overall economic growth.
The private sector generated 206,000 new jobs in the January 2020 employment report while government added 19,000 for the net gain of 225,000, somewhat faster than the three-month pace of 211,000. The unemployment rate increased to 3.6%.
The primary reason behind the larger-than-forecast increase in top-line employment growth was the 44,000-job increase in construction and 72,000-job increase in education and health. Both of these are because of seasonal and one-time factors and will not be replicated inside the February employment estimate. We do not see the January employment data as a signal of an impending breakout above the 175,000-per-month average posted in 2019.
In addition, the Bureau of Labor Statistics’ benchmark revision to the April 2018-March 2019 figures resulted in a net reduction of 514,000 in total employment. In our estimation, the downward revisions imply that there is plenty of labor slack left in the economy, provides insight into why wages remain soft so late in the business cycle and implies strong directional policy guidance for the Fed.
We think that this provides the Federal Reserve with ample room to hold the policy rate in its current range between 1.5% and 1.75% without losing its anchor around inflation expectations.
Slow wage was again evident in the report, with average hourly earnings increasing 0.2% on the month and 3.1% on a year-ago basis. Aggregate hours worked increased by 0.2% while manufacturing hours worked remained unchanged in January. The manufacturing sector shed 12,000 jobs on the month in contrast with the strength illustrated in the private service-providing sector, which added 174,000 on the month.
The leisure and hospitality sector added 36,000 jobs, business services 21,000, the information sector 5,000, trade and transport 27,000 and the goods-producing sector 32,000. The retail trade sector lost 8,000 jobs and the financial sector contracted by 1,000.