At the January FOMC press conference, Fed Chairman Jerome Powell famously spoke about "contradictory signals" bedeviling the economic outlook and warranting a sharply dovish turn in monetary policy. In contrast, and despite the noise introduced by the recent partial government shutdown, the January jobs report sent a clear signal that the U.S. labor market has barreled on, undaunted. Investors and policy makers may be concerned about the economic outlook – and business confidence in particular – but it's clear that employers are managing to the upside risk by snatching up talent where they can.
Here are a few highlights and further reflections.
- Underlying momentum: For all the hits to business confidence, employers are still betting that the U.S. economy will shrug off financial market volatility and domestic and international political uncertainties. Note that the 3-month moving average of 241k is virtually unchanged from the prior month’s as-reported 254k – and far more than needed to keep unemployment falling (estimated to be around 100k per month.
- Signs of the partial government shutdown: There was a big jump in part-time employment (U6 “underemployment” rate) and uptick in short-term unemployment rate.
- Fed narrative gets complicated: This report could undermine the narrative at the Wednesday FOMC, and the newly dovish Fed may have to reverse course before long. As the shutdown fades into the past (and if another one doesn’t do more damage), the Fed will lose one of its arguments for pausing, leaving it to rely on global headwinds, trade & Brexit uncertainty; financial conditions have already improved considerably.
- Fed outlook gets shaky: It's going to be a rocky quarter or two for the U.S. central bank, with a lot of risk to its credibility. Yet if markets find the Fed credible, implied interest-rate volatility should be restrained. Reportedly, it still is, but how long can that last? Already we've seen 2 about-faces from the Powell Fed: one in the autumn and another in the winter. If U.S. data hold strong and the Fed does reverse course yet again, the central bank may look waffly. Credibility is a lot like implied volatility, in that everything looks fine until suddenly nothing does. Warren Buffett's famous quote about reputation comes to mind.
- “Slack” may still be present in the labor market: The recent acceleration in wage growth has coincided with a rise in “prime age” (25-54 years old) labor force participation. This is the strongest evidence in favor of residual slack in the labor market. Importantly, this is NOT the reason Powell cited for the Fed's pause at the January FOMC.
- Labor shortage vs. need for upskilling:
- Lack of skills is different from lack of people. Shortages for certain technical skills may be real – even if the solution is just for employers to *hire people* and put more effort into *training* them. That requires nonwage labor expense but drives up productivity.
- Lack of investment in workers could help explain why labor productivity has been so low (and set to take a plunge as Q1 GDP sinks but job growth remains strong). That's at the heart of a lot of economic discontent (and political turmoil).
- Job growth to continue: It may even be accelerating, according to a leading indicator. iCIMS' Monthly Hiring Indicator data saw a pop in new job openings in Jan., suggesting that employers continue to expect robust demand in the coming months. This pop extended the recent declines in the job-filling rate, suggesting wage pressures will continue to rise.
- Competition for talent: While wages are rising, they’re not skyrocketing. Employers will have to get more creative in enticing employees, or risk losing out to competitors, but unfortunately there's little in the way of data to guide them. For now, all we can say is that they will be hard-pressed to fill all these new positions unless they look at their total offering, beyond just salary. Since those negotiations will reshape workplace standards over time, let's hope the latest job candidates are asking for things that will benefit the rest of us.