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Yesterday, I spent a lot of time talking about how the jobs report was likely to meet expectations, but the underlying assumption was that the risks were to the downside. I talked about how, if job growth fell short, it was likely due to a lack of workers rather than a lack of jobs. I did mention the report could surprise to the upside, but didn’t give it a lot of attention. So when I looked at the actual data this morning, I can summarize my reaction with one word: Wow!
A Look at the Numbers
This is an extremely strong jobs report. Job growth, at 528,000, was over twice expectations. Private payroll growth, at 471,000, was over twice expectations. Manufacturing payrolls, a particular worry, were up by half again over expectations. And when you look at how hard existing employees were working, the average work week rose from 34.5 hours to 34.6 hours, up by about one-quarter of a percent. That doesn’t sound like much, but overall it adds the equivalent of another couple of hundred thousand jobs in labor demand.
We saw the same thing in the supporting data. The unemployment rate dropped from 3.6 percent to 3.5 percent, tied for the lowest level since 1969. Average hourly earnings were up by more than expected. And all of this when the labor force participation rate actually dropped a bit, suggesting more people were moving into the labor force. There really weren’t any weak points in this report.
So, What Does It Mean?
The economy. What this means for the economy is simple: there are more people working and making more money—and that is a good thing. Note that the growth in jobs didn’t slow, but instead accelerated despite the Fed rate hikes, despite inflation, and despite all of the very real worries out there, which is another good thing. The economy, especially the labor market, clearly has considerably more momentum than it has been given credit for.
Investors. What does this mean for us as investors? First, a recession now looks less likely or, at a minimum, farther away. Those wages will be spent, which will keep the economy growing. Second, the Fed will keep raising interest rates until we do see a slowdown. Given the Fed’s dual mandate of employment and steady prices, with job growth strong the Fed is free to keep after inflation, so rates will keep going up.
The market. For the market, it’s more complicated. With the Fed unleashed to keep raising rates, that will affect stock valuations negatively. But with growth likely to be stronger, earnings should grow faster. Overall, this combination has historically been positive, but we can certainly expect some turbulence in the short term as markets adjust.
Very Good News
Despite the likely market turbulence, this morning’s very strong jobs report is very good news. More people working, at higher wages, is a sign of economic strength. And with all of the headlines out there, we can certainly use the good news.
