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Weekly Economic and Financial Commentary: A Solid Week To Be Sure, But Keep an Eye on the Details

U.S. Review

A Solid Week To Be Sure, But Keep an Eye on the Details

  • U.S. employers added 225K new workers to their payrolls in January, which handily beat expectations. But the factory sector shed jobs for the third time in four months, and net layoffs were reported for finance and retail as well.
  • For the first time in six months, the ISM was not in contraction territory in January. A first step toward de-escalation in the trade war helped, but coronavirus worries are not yet showing up in these numbers.
  • The economy is still growing, but we’re not out of the woods yet with the trade war, and the coronavirus is still a developing threat that we are only beginning to understand.

Strong Jobs Numbers Tempered by Sign

U.S. employers added another 225K workers to their payrolls in January, an outcome that exceeded expectations. Owing partly to the fact that more people are entering the in the labor force, the unemployment rate edged higher to a still-low 3.6%.

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Another drop in initial claims for unemployment insurance attests to the fact that the labor market remains tight, but there were a few chinks in the armor of this otherwise solid jobs report.

The manufacturing sector lost jobs for third time in four months, and there were no auto strikes to blame this time. Layoffs were not limited to the factory sector either as financial services went from slowing job growth to a slight decline in January. Retailers also posted net layoffs for the second time in three months.

Elsewhere, the gains were broadly based and the strong demand for labor helped lift wage growth to 3.1%. We expect wage growth to strengthen this year, but only modestly. Compensation plans have improved somewhat, but fewer job openings and pockets of layoffs, even if only temporary, suggest demand for labor has cooled since the middle of last year.

A hallmark of the current cycle has been that despite a low unemployment rate, there has not been sustained periods of the sort of strong wage growth it takes to meaningfully push inflation higher. On that basis, we see little to change in the Fed’s intentions from today’s solid jobs report.

Manufacturing ISM Edges Up, More Strength in Services The ISM manufacturing index came in at 50.9 in January after touching the lowest level since the recession in December. This key yardstick for the manufacturing sector had been in contraction territory for five straight months. So the move to expansion from contraction is certainly welcome, but we are not completely out of the woods with the trade war, and we are only beginning to understand the potential effects of the coronavirus outbreak and what it means for supply chains. The non-manufacturing ISM has been less vulnerable to some of the factors that have buffeted the fac