Short Note on Jobs Report

The January employment report was mixed.  It is unlikely to have a material impact on expectations for Fed policy.  However, it does suggest the downside risks may not materialize.  

The US economy grew 304k jobs, well above expectation.  It is marred by a 70k net downward revision of the past two months, and notably a 90k cut in December's estimate, which brings it to 222k (from 312k).  The participation rate edged higher, and at 63.2%, it stands at a five-year high.  

The unemployment rate unexpectedly ticked up to 4.0% from 3.9%.  Manufacturing added 13k jobs, which is the weakest in five months.  However, the disappointment was mostly in the underemployment rate increase to 8.1% from 7.6%, which could partly reflect the contract workers for the federal government, and the miserly 0.1% increase in average hourly earnings.  The year-over-year pace slipped back to 3.2% from a revised 3.3% in December. 

The US created an average of 241k jobs over the past three months.  That matches the highest since last June. However, the Fed's pivot means that the jobs report will not boost the chances of a rate hike in the next several meetings.  It says little about what Powell called cross-currents.  Strong jobs growth without wage pressure does not push the Fed away from its patient and flexible stance.   

To the extent that the jobs data sets the tone of the month's economic reports, there is little to suggest a material change in the pace of economic activity.  Still, between the government shutdown and the Arctic freeze in large parts of the country, coupled with the quirky seasonality that has often meant soft Q1 growth, the 304k net new jobs may overstate the momentum at the start of the year.    The market took the report in stride with a relatively muted reaction.  

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