The only thing standing in the way of an interest rate hike this week is the blizzard that’s supposed to hit the Northeast corridor on Tuesday, which might postpone the Federal Reserve meeting (unless they meet by conference call) but it only delays the inevitable.
If the verdict hadn’t been sealed already, it surely was after last Friday’s February jobs report. The Labor Department reported that nonfarm payrolls rose by 235,000, well above the consensus estimate of 200,000 and at the high end of individual forecasts. Labor also upwardly revised January’s figure to 238,000, making it the best back-to-back performance since last July. At the same time, the unemployment rate fell to 4.7% while the labor participation rate rose another tick to 63.0%. Wages grew 2.8% compared to a year earlier.
The report was actually the second strong jobs story of the week. ADP said private sector payrolls jumped by 298,000 last month, beating the consensus forecast by more than 100,000.
While I’m reluctant to give a president who’s been in office less than two months much credit for this showing, I think we have to give President Trump more than a few props for it. Despite the daily barrage of attacks, negative stories and fake news in the so-called mainstream press on Trump, unquestionably he has almost single-handedly changed the investment tone in this country since he was elected. First, it showed up in the stock market; now it’s starting to goose the employment numbers.
As we’ve already seen in surveys of both consumers and small businesses since November, confidence is through the roof. That’s all well and good, of course, but would that be enough to convince companies to boost hiring?
The mere fact that the current administration is at least talking about making it easier for businesses to operate – whether as the result of reduced regulation and requirements, lower taxes or increased government spending on infrastructure projects – is a welcome sign following eight years of policies that stifled business investment. People are clearing buying into this – literally.
Although it’s gotten the very little blame for it, nothing has hurt business investment and job creation over the past eight years more than the incongruously named Affordable Care Act, aka Obamacare.
Fearful of taking on the onerous obligations of the law by hiring full-time employees (i.e., those who work more than 30 hours per week) many businesses have seen fit to hire only part-time or contract workers, adding only full-time people if they absolutely have to in order to maintain their businesses. And we’ve certainly seen the result of that in stock market performance. Instead of hiring more people, many companies have chosen to either retain earnings or pass them along to shareholders in the form of bigger dividends or stock buybacks, which has buoyed equity prices.
That’s why there’s been such a big disconnect between the performance of the S&P 500 and GDP over the past eight years. Obamacare has certainly been good for stock investors, but not so good for business investment and economic growth.
Now, apparently, just the mere possibility of repealing and replacing Obamacare has been enough to inspire some companies to start hiring.
Just look at the types of jobs that companies were filling in February. Gains in construction and manufacturing were the primary drivers in both the Labor and ADP reports. According to the Labor report, construction jobs jumped by 58,000, the strongest in almost 10 years, following a 40,000 increase in January. Manufacturing jobs rose by 28,000, the most since August 2013. By contrast, lower-paying retail and service jobs, one of the leading job growth categories under Obama, fell by 26,000, the most in four years.
That same confidence showed up in the labor participation rate, which rose again last month to an even 63%, the third straight monthly increase. That’s still a far cry from the peak 67% range of the late 1990s, but up from 62.6% just since last November. Looked at the other way, the number of people out of the labor force fell by 176,000 to 94.2 million. Still way too many, but at least heading in the right direction. So as businesses are hiring more people, more people are motivated to look for work again. Labor participation has been in sharp decline since – guess when? – 2008. Hopefully, now we’ve turned the corner.
Of course, the flip side of this improvement in jobs is higher interest rates, but I would venture that most people – outside of those who work in the mortgage and housing industries and those others heavily dependent on low rates – are happy about that, too. After all, everyone outside the Fed knows that rates have been held artificially low for at least five years, if not longer, and have been hoping for a return to normal. Now we seem to be on the cusp of it.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.