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Commentary By Mickey D. Levy

Surprisingly Strong U.S. Employment Report for January

Economics Employment

Job growth in January 2019 was surprisingly strong with payroll gains of 304,0000 and average hourly earnings growth remaining above 3% yr/yr for the fourth consecutive month, seemingly defying mounting concerns about global economic conditions, the government shutdown, and declines in various confidence surveys.

The gain of 304,000 jobs in January nearly doubled consensus (165,000), but significant revisions to the January data seem likely.  The Bureau of Labor Statistics announced that the initial response rate for the Establishment Survey was just 61%, the lowest since 2008. The December report also had a low initial response rate and its data was revised down sizably today to 222,000 from 312,000. Nevertheless, the final January data should continue to reflect a healthy labor market. 

The unemployment rate increased to 4.0% from 3.9% in January, as Federal employees furloughed by the government shutdown are usually recorded as unemployed in the Household Survey. According to the BLS, “Among the unemployed, the number who reported being on temporary layoff increased by 175,000.” This suggests that the measured number of unemployed will fall in February, lowering the unemployment rate below 4%.

The labor force participation rate continued to defy expectations, rising for the second consecutive month to 63.2% from 63.1%. It jumped to 82.6% from 82.3% for prime working-age persons, the highest since April 2010 The rising prime working-age labor force participation rate suggests that confidence in job-finding prospects remain strong and that the potential labor supply is larger and more elastic than assumed. We believe this to be the most important labor market development in recent years that explains the stronger-than-expected job growth and healthy but constrained wage gains. Fed officials are finally taking note of this important trend. The underemployment rate, a broader measure of labor market slack, jumped to 8.1% from 7.6%.

The continued acceleration in nonfarm job growth since late 2017 is remarkable and likely attributable to the Tax Cuts and Jobs Act. Job growth around 120,000 is more than enough to keep the unemployment rate under 4%. We maintain that a relatively large potential supply of labor, including prime age people re-entering the workforce, will continue to drive these healthy job gains.

The goods producing industry added 72,000 net new jobs, the most since February 2018, fueled by a 52,000 increase in construction employment. The continued strong job growth in construction is perplexing given the sector’s reported chronic labor shortage, but provides a good sign for the housing sector. Manufacturing payrolls increased by only 13,000 in January, reflecting the more downbeat sentiment in an array of industrial sectors that are vulnerable to slower global growth. Mining employment rose by 7,000, despite lower oil prices.

The service-providing sector added a massive 224,000 jobs. Notable gains occurred in the retail sector (21,000), transportation and warehousing (27,000), and education and health services (55,000). Leisure and hospitality employment growth has been exceptional recently, adding 247,000 total jobs in the last four months.

Aggregate hours worked increased by 0.3% m/m, indicating that activity continued to proceed at a solid pace. The aggregate weekly payrolls index that combines average hourly earnings, average weekly hours, and employment, grew by a solid 0.3% m/m, lifting its yr/yr gain to 5.7%—and should support strong consumption growth in January.   

U.S. economic growth is slowing from its rapid 2018 pace, but the continued robust gains in employment may cause pause to commentators that have been calling for recession. We expect consumption to grow, which should offset a flattening of business capital spending and support sustained GDP growth.

Mickey Levy is the chief economist for the United States, the Americas, and Asia at Berenberg Capital Markets, LLC and a member of E21's Shadow Open Market Committee (SOMC). The views expressed in this column are the author’s own and do not reflect those of Berenberg Capital Markets, LLC.

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