The jobs report reconfirms that the U.S. recovery is for real and here to stay. The Fed may or may not be ready to start the long-awaited tightening cycle in June, but this report shows all over again that the economy is more than capable of absorbing higher rates.
This morning’s Bureau of Labor Statistics (BLS) jobs data shows that the U.S. economy created a total of 297K jobs in February vs. estimates of 240K and the prior month’s tally of 239K (which was revised lower: 239K vs. 257K originally). The unemployment rate went down two ticks to 5.5% from 5.7% the month before, which is down from 6.7% in February 2014. The labor force participation rate was little changed from the prior month at 62.8%, with this key ratio bouncing around in a very narrow range of 62.7% to 62.9% since April 2014.
Average hourly earnings increased by a weaker-than-expected +0.1% from the preceding month and +2% from the year-earlier month to $24.78 per hour. This is a slower wage growth pace compared to what we saw in January, but modestly better than the December rate, likely indicating some improvement in this key measure. Wage growth in this recovery cycle has lagged prior cycles, though the lack of inflationary pressures and the recent drop in energy prices has effectively been working to giving real household buying power a boost.
Any way you look at it, this is a positive labor market reading, which should give the Fed plenty of confidence to start the interest rate ‘normalization’ process sooner rather later. The Fed has been going out of its way to emphasize that it is in no hurry and would prefer to remain ‘patient,’ particularly with inflation readings remaining below its target levels. The reference to low inflation in the recent Fed commentary comes across as an excuse for not hiking rates in June.
I have all along been of the view that given how long interest rates have remained at this low level, it makes perfect sense for the Fed to start building some (interest rate) cushion before the next crisis hits – it simply doesn’t have the traditional monetary policy tool of interest rate cuts in the present environment. As this morning’s jobs report reconfirms, the U.S. economy is strong enough to easily withstand a well-telegraphed slow increase in rates, irrespective of what short-term impact that has on the dollar exchange rate and corporate profits.
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