Credit: Shutterstock photoIt will be hard in many ways to know what to make of the jobs report that came out at 8:30 this morning. We saw the first negative headline number for a long time, but there is a lot of uncertainty as to what extent the two major hurricanes that came last month influenced that, as the wide spread of forecasts by economists going into the release would suggest. Other data included in the report, however, are less directly affected by the weather than is job creation. Average hourly wages, which showed robust growth of 2.9% YoY, are more likely to reflect long-term trends in employment than short-term disruptions, and it is a number that has great importance right now.
It is, after all, pretty well established at this point that the labor market is doing well in terms of unemployment. Over the last few months the actual number of new jobs has been lower than for most of the last eight years of the recovery, but that is a function of the very positive fact that after one of the deepest recessions ever, we are close to what is regarded as full employment in the modern labor market. One would expect that to translate to upward pressure on wages and therefore on prices, but so far that has not been the case. Wages have been climbing, but slowly, and inflation has remained lower than desired.
When the Fed, and at that time Congress as well, embarked on the stimulative policies that are at least in part responsible for that recovery, it was feared by many people that roaring inflation would be the inevitable result. If anything, the Fed has had the opposite problem; they have been looking for ways to get inflation up to their two percent target rate, not control it. As long as that is the case, interest rates will remain extremely low. Even if we do see the occasional quarter-point hike, we are well below historical averages and, more importantly, well below the return that one can reasonably expect from equities, which drives capital into the stock market.
The only thing that will change that is if the Fed should be given enough of an indication of an inflationary environment to cause accelerated rate hikes. The hawks on the FOMC have been cowed into submission for now, but historically speaking, inflation is the number one enemy of central bankers. Given that, the strong wage growth reported this morning could easily be seen by some committee members as a reason to hasten the normalization of rates either directly or by actively selling the bonds that the Fed currently holds. That could derail the current strength in stocks and at these record highs any resulting downward move could quickly become exaggerated.
That is possible, but this Fed has a history of ignoring short-term fluctuations in data, and looking at long-term trends. From that perspective, we are still in a low inflation-low growth environment where there is far more risk in raising rates prematurely than in delaying. The continued low interest rates that result from that make stocks look attractive, even at these levels, and will drive us to yet more highs.
The first Friday of each month is normally all about non-farm payrolls and the fact that the economy actually shed jobs after years of gains will undoubtedly grab the headlines. That will cause some immediate selling, but the wage numbers in this report have the potential to be more impactful. If the Fed can live with the current level of wage increases and remains focused on keeping rates low, then consumers with more money in their pockets is a strong positive, so, looking beyond the headlines, it is likely that any dip that follows this release will quickly reverse.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
