The February jobs report may not have been the blowout that the ADP report had suggested but the 235,000 rise in payrolls, coming on the heels of a 238,000 increase in January, points to a robust labor market. The combined gains in January and February are the strongest since June and July of 2016. Other details in the report point to continued economic expansion and possibly a faster pace of expansion as well.
The 235,000 gains in jobs was broad based. The private sector added 227,000 new jobs while government added 8,000. Within the private sector, goods-producing industries added 95,000 new jobs led by a 58,000 gain in construction jobs. Manufacturing industries added 28,000 jobs, including 10,000 in durable-goods industries and 18,000 in nonmanufacturing industries. These gains are well above the average gains over the past 12 months.
Still, most new jobs continue to come from private services industries. Private services added 132,000 jobs in February. While that is substantially larger than the jobs from goods-producing industries, it is well below the average 163,000 monthly jobs gain over the past year. The gains in private services were led by a 37,000 gain in professional services industries, a 32,500 increase in health care, 29,300 new jobs in education, and 26,000 new jobs in leisure industries. Partially offsetting these gains was a surprising 26,000 job loss in the retailing industry.
These jobs gains helped pull the unemployment rate down by 0.1 percent to 4.7 percent, and just 0.1 percent above the recent cycle low of 4.6 percent hit in November 2016. The unemployment rate would have been much lower if the participation rate hadn’t risen to 63.0 percent in February from a low of 62.4 percent in September 2015. That equates to 3.2 million people entering the labor force, or about 191,000 per month.
As jobs gains have outpaced new entrants to the labor force, the labor market has tightened which is helping drive wages higher. Average hourly earnings rose 0.2 percent in February and are up 2.8 percent over the past year. While those gains are mild by historical standards, the pace of gain has improved over the past year and a half.
Combining the jobs gains with a longer work week and the accelerating pace of hourly earnings, overall income for the consumer sector is growing at a respectable pace. The index of aggregate weekly payrolls is rising at a 4.3 percent pace over the past year and should help support consumer spending.
Consumers have been the backbone of the economic expansion. The strong dollar and weak global growth are restraining export growth while business investment has been tepid for much of the recent expansion. However, with ongoing growth in consumer spending and a renewed sense of optimism following the election of Donald Trump, businesses may finally boost investment spending.
Overall, strong support for consumer spending, the potential for accelerating business investment, less of a drag from net exports, and the potential for greater government spending in the form of higher defense spending and increased infrastructure investment all point to the potential for faster economic growth in the coming quarters. This positive outlook is consistent with the rebound in our business cycle Leaders Index. Our index now stands at 75 – on a scale of 0 to 100 – where readings below 50 suggest increased risk of recession and reading above 50 suggest continued economic expansion. Our Leaders index is well into expansion territory and up from a low of 38 in early 2016.
This outlook should be supportive for equity markets and may be a risk for fixed income markets. Better economic growth should help companies grow earnings, a key driver of equity performance. However, faster growth and the potential for faster consumer price increases is likely to push the Fed to raise short-term interest rates. Three rate hikes in 2017 are likely including one following the March 15 FOMC meeting. These two forces may be somewhat offsetting for equities but overall a net positive. The combination of faster consumer price increases, Fed rate hikes, and potentially bigger federal deficits may be trouble for fixed income markets especially Treasuries. Bottom line is the outlook for the economy is improving.