Nonfarm Payroll Report Better Than It Appears

Nonfarm Payrolls

The February nonfarm payroll report numbers were released Friday morning, and they disappointed the analysts. The market didn’t agree and put in a strong rally in response.

You can’t just go by how a report compares to the estimates of analysts, and February’s jobs report is a good example of this. Following a tremendous amount of new jobs being added in January, 311,000 of them in fact, analysts were predicting that this latest report wouldn’t show such a robust number of new jobs, but were expecting a lot bigger number than the one we just saw.

Instead of the 180,000 new jobs that economists predicted we would see here, we only saw a paltry 20,000 added. There’s a lot more to the state of the job market than just the number of new nonfarm jobs added though, and when we look at things in more depth, we can see a lot of good news out there.

The first thing to realize is that the consensus estimate isn’t just pulled out of thin air, it is based upon what is actually going on in the economy. Analysts don’t know how many new jobs we will get but they can look at other data to gain a good understanding, and this data did show them that we should see a pretty nice number of new jobs added last month.

If the estimates were low, say only 20,000, and the report met these estimates, that actually can be seen as a worse result. People who study the economy would not be seeing much and we did not end up with much either in this scenario.

There’s actually two parts to this, the estimate and the actual, and both actually speak to the state of the economy. We should want both to be high, but if only the estimate is high, that still counts for something as long as other things are positive.

This is far from where this story ends though, and there is other data in this report to consider, starting with the fact that this 20,000 was over the 311,000 that we added last month. We could say that the job market held serve here, and added even more to this cumulative total. When we see this number go down, that’s when we need to be concerned, not when we better what was an extremely impressive number of new jobs added lately.

It’s not that things are booming or anything lately in the economy either, with GDP growth on the decline, and now projected to only grow about 2% annually. Investors do want some heat here but not too much, and this is actually a nice amount, where the economy is still growing but not by so much that the Fed is stepping in to slow it down intentionally.

This Report Actually Was Pretty Solid

If new jobs continued to grow at the frantic pace it did in January, this would be all the more reason for the Fed to lean more towards raising interest rates, something that would serve to constrict both the economy and stock market prices.

Josh Shapiro, chief U.S. economist at MFR, tells us that the recent data from this report “are very solid,” especially when we consider “the constrained supply of skilled labor.” Shapiro also advises us to take this number with a grain of salt, with the salt being other numbers in the report that show more strength and do serve to spice up this 20,000 number quite well.

The unemployment rate actually declined from 4.0% in January to 3.8% in February. While these are both nice looking numbers, lower is better here. We did add some jobs after all though, so it’s not that this number is surprising, as we would expect that more jobs equals less unemployment.

We have been on a tear over the past few months in adding jobs though, but there is only so many you can add because there are only so many people who don’t have a job. When the unemployment number goes down, then you know we’re doing pretty well overall.

We not only want to look at the quantity of the labor market, we also need to consider where wages are going overall. There is more good news here, where our year-over-year wage growth moved up from 3.1% in January to 3.4% in February. This is another sign of a growing job market.

We Don’t Want the Numbers to be Too Big Here

We also need to look at how all these numbers fit in with broader economic forecasts like GDP growth. Michael Pierce, senior U.S. economist at Capital Economics, tells us that they are well aligned, which is exactly what we should want now.

Pierce explains that the reason is that this “makes us more confident that the Fed will remain on hold this year and that its next move will be to cut rates.” This is pretty high on the wish list of investors, at the top of it actually.

In spite of this being a down day in the markets compared to the close on Thursday, this was due to off-market traders knocking stock markets down further overnight. The Dow, for instance, opened up 200 points down, but it spent the day rallying to overcome this deficit.

If we just look at the trading during the main session, after this report was released and digested by the New York market, Friday was actually a pretty bullish session. If we count the short after-hours session, the Dow actually gained 225 points from the open, the first real rally we’ve seen all week.

The market therefore sure didn’t mind this report, and voted for it quite optimistically. This was actually the first good news that moved the market up in a convincing way since all the way back on Feb 25, when traders had visions of trade deals dancing in their heads, before we realized that this wasn’t going to be anywhere near as easy to get done than some thought.

We still have given up a good amount this week though, but this rally on Friday should at least provide some hope that next week will be better.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.