Hiring slowed substantially in January, but the fact that more people were working for higher pay signals strength in the labor market and dashes a little of the recent pessimism about the economy.
Nonfarm payrolls rose by just 151,000, far short of the expected 190,000. The strong 292,000 gain in December was also reduced by 30,000 workers. But the unemployment rate fell to 4.9 percent, from 5 percent, as more people joined the work force. That shows up in the participation rate, which rose slightly to 62.7 form 62.6 percent. Another highlight of the report was the 0.5 percent increase in average hourly wages, or a 2.5 percent gain year over year.
“I think it’s a good number despite the headline. I think it raises more questions than it answers. If it was a weak number, people would say it fits into the narrative of the last few weeks. I think this number changes the narrative,” said Jim Caron, fixed income portfolio manager with Morgan Stanley Investment Management.
In the past week, ISM’s services sector data showed a slowdown in growth in that key area of the economy, and unemployment claims have been rising slightly. Productivity also fell unexpectedly in the fourth quarter. While first quarter growth is expected to pick up, GDPgrowth was only 0.7 percent in the fourth quarter.
The slowdown in services growth was worrisome, given that the manufacturing sector has been in recession.
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This sluggishness, along with turbulence in financial markets and a steep decline in oil prices, has shaken confidence in the economy and has made it less likely the Fed will be able to raise rates.
“What it’s telling us is that the underpinnings of the economy, the labor market in particular, is still pretty strong despite all the craziness that took place in January,” said Caron. “You’re going to have easy policy with the data starting to improve and the Fed not getting in its way.”
Stocks were sharply lower Friday, while Treasury yields moved higher, particularly at the short end.
The 2-year note, sensitive to Fed policy, rose to 0.75 percent. The market also priced in slightly higher odds of a Fed rate hike for the year, but there was still only a 15 percent chance of a hike in March, according to RBS data.