One of the most important monthly economic data releases is the U.S. labor market report. This data really moves prices, even if it’s sometimes quite heavily distorted by numerous statistical adjustments and cleanups.
But what really matters here is the trend. Once a month you should also look at this data. Especially at the reaction of the market if you own stocks or want to buy some.
U.S. Labor Market Strong – Because of New Adjustment Method?
Last Friday, it was that time again. The market is looking for the number of new jobs created. This was significantly above expectations in January, which is a good sign of a strong economy.
Outside of agriculture, 467,000 new jobs were created. Analysts had expected only 125,000 additional jobs.
However, new seasonal adjustment models have been in place for a few months. This could be one reason the figures look so rosy. The figures for newly created jobs in the two previous months were also revised upward very sharply. According to the updated data, 510,000 additional jobs were created in December (previously: 199,000) and 647,000 in November (initially: 249,000).
If we apply a factor of about 2.5 to the new “adjustment method,” the January figures of 312,000 would be in line with economists’ expectations under the old calculation method. However, 467,000 new jobs were reported – about 50% better. In other words, even taking into account the new adjustment method, the numbers are strong!
The Downside: Persistent Wage Inflation
So the U.S. economy continues to run very strong! The flip side of the coin: when many companies are desperate for workers, they have to entice workers with higher wages. The data proves this.
Average hourly wages increased by 0.7% in January compared to the previous month. An increase of 0.5% was expected, following a revised increase of 0.5% as well (initially 0.6%) in the previous month. In other words, wages are climbing quite strongly. A monthly increase of 0.7% corresponds to an annual rate of +8.73%!
This means: significantly higher personnel costs for companies, lower profits and thus lower share prices. And since workers also spend their extra wages, more inflation.
Why You Need to Watch the Labor Market Report
On the one hand, the strong figures from the U.S. labor market are a sign of a robust U.S. economy. On the other hand, they point to sustained inflationary pressure. They’re likely to make rapid interest rate hikes by the Federal Reserve even more likely.
On Friday, the markets didn’t quite know what to make of this mix. The stock markets, gold and the dollar closed virtually unchanged after volatile trading. The only clear reaction was in bonds: interest rates jumped up again.
The stock market in the U.S. has already priced in three to four interest rate steps. However, if the data then points to continued inflationary pressure, things could also become tight for previously strong U.S. stocks. As an investor, you should therefore continue to pay attention to the monthly U.S. labor market report. In particular, to the data on wage inflation.