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FLASH: Job creation and wage growth are still important things to watch for in the monthly NFP report for February that will be released Friday.
The other partial indicators already suggest that the labor market will remain solid.
The focus now will be on the labor-force participation rate because the pace of re-engagement of workers is a potentially important influence on aggregate demand, the economy’s supply potential, inequality and the accommodative nature of Fed policy for markets.
The partial indicators drawn from private sector surveys, company reporting or measures of job vacancies suggest that the labor market remains healthy.
This should drive monthly job additions for February within or above the 120,000-150,000 range that would be predicted for this late stage of the economic cycle based on historical precedents.
While that would be lower than January’s 304,000 number, it is consistent with a pace that would continue to underpin solid consumption growth and better household finances, especially if supported by steady annual wage growth of 3 to 3.5%.
Where the unemployment rate, at 4% in January, ends up will increasingly be a function of the labor-force participation rate, which has encouragingly crept higher, from 62.7 to 63.2%, over the past 12 months.
A participation rate that is trending higher is desirable in the following ways, as follows:
- It supports the demand side of the economy by further boosting household income.
- It improves the supply potential, especially as a growing number of firms have already been signaling growing labor shortages
- It helps contain income inequality at a time when those on the lower echelons of the income distribution scale have already and persistently fallen well behind those who are better off in terms of income growth, wealth and opportunities.
Markets should also hope for greater labor participation.
By helping to counter inflationary pressures, even though they are moderate now, and by suggesting residual slack in the economy, a higher reading would encourage the Fed to maintain the patience SDovish policy stance it pivoted to in January. That would fuel the type of loose financial conditions that favor risk assets.
“For the well-being of the economy and short-term asset values, as well as for a Fed that is under increasing political pressure and whose credibility has taken a hit from the recent policy U-turn, the hope is that the February employment report will deliver more than solid job creation and continued wage growth. A 0.1 percentage point to 0.3 percentage point rise in the participation rate would, especially if continued, provide comfort for those who worry that America’s late cycle dynamics may not be enough to power the economy to another year of 2.5% to 3% expansion, especially given the fading effects of the one-off boosts to growth and the headwinds from abroad.” said economist Mohamed A. El-Erian
So, together with the higher business investment reported in the Q-4 GDP report, an increase in the participation rate would point to more favorable structural tailwinds, which would also help growth be more inclusive.
This would be better than a decline in the participation rate, which would signal a labor market that remains structurally impaired, a higher threat of a greater marginalization and alienation of the less fortunate segments of society, and a Fed that is more exposed to the risks of miscommunication and further policy uncertainty.
Thursday, the major US stock market indexes finished at:
DJIA -200.23 at 25473.23, NAS Comp -84.46 at 7421.48, S&P 500 -22.52 at 2748.89
Volume: Trade on the NYSE came in at 921-M/shares exchanged
- Russell 2000 +13.0% YTD
- NAS Comp +11.9% YTD
- S&P 500 +9.7% YTD
- DJIA +9.2% YTD
HeffX-LTN’s overall technical outlook for the major US stock market indexes is Bullish in here.
Editor’s Note: Mohamed A. El-Erian is the chief economic adviser at Allianz SE
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