NFP Figures Encourage Fed to Raise Rates

Donald Trump’s first full month was as good for employment figures as it was for the stock market. The continued positive trend will likely encourage the Federal Reserve to raise the interest rate when they meet later this month. Unseasonably warm weather helped the construction industry outperform. Still, many analysts credit President Trump’s pro-business stance for a new optimism which has convinced business owners to add staff.

In addition to an increase in jobs, the salaries also improved as compared to last year.  This showed that the increase was not due primarily to unskilled labor. Another positive sign was the drop in the number of people who are no longer participating in the labor force. The Bureau of Labor and Statistics no longer counts some of these people in the unemployment statistics because they have stopped trying to find work.

Positive NFP figures suggest Fed interest rate hike.

NFP Outperformed Expectations

The Non-Farm Payroll (NFP) is one of the most important economic indicators for the United States. The numbers for February exceeded expectations by a healthy margin. Economists had expected an additional 190,000 jobs. Instead the country created more than 235,000 jobs. However, 58,000 of these positions were associated with the construction industry. Only 157,000 people were referred to the unemployment office due to poor weather instead of the monthly average of 311,000 workers.

Government Hiring Decreased Substantially

Government, a traditional driver of employment, has taken a huge hit. Trump froze hiring for Federal employees outside of national security hires. In February, the government added only 8,000 jobs. In contrast, government positions rose by a monthly average of 15,000 jobs in 2016. This shows that the President is serious about reducing the cost of running the government. If the hiring trend continues, manufacturing jobs could soon overtake government positions as a percentage of the labor market.

Salaries Increased Along with Jobs

Of course, creating new positions is only part of the story. If the number of jobs goes up while salaries stay stagnant, these is typically due to the new jobs being low-paying. For the last month, salaries as measured by hourly earnings rose by almost 3 percent. January also showed a 2.6 percent annualized increase, which calmed fears that sectors requiring skilled labor were not participating fully in the economic recovery.

Unemployment is Reaching its Lowest Point in Nearly a Decade

President Trump has stressed the need for a more accurate picture of unemployment. When looking at both the traditionally unemployed, as well as those workers have quit looking for work, and those who have only been able to find part-time work, the United States is reporting its best unemployment figures in almost nine years. Trump hopes to add 25 million jobs by 2027, and that means the economy will need to add an average of 208,000 jobs a month. Given the aging population of the country, this rate of growth may be difficult to sustain.

How the Fed Views the NFP Figures

The Federal Reserve will probably rely on the NFP figures to implement interest rate hike when they meet on March 15th. The Fed has raised rates three times since December. A several year freeze on rates ended at that time thanks to an improved economy. According to plans detailed last year, the Fed will likely approve seven rate hikes over the next two or three years. Fed Chair Janet Yellin has already advised that she believes the country has reached de facto full employment, and that interest rates should go up more frequently in the next two to three years.

The NFP figures factor into the Fed’s rate decision because as the number of people in the labor market increases, there is a corresponding increase in consumer spending. Additionally, as the available labor pool becomes smaller, employers need to offer workers higher salaries to stay competitive. Low unemployment also leads to increased consumer confidence. The latest survey of consumer sentiment shows that consumer confidence is at a 15 year high.

How Does the NFP Report Affect Trading?

Investors have already shown that they agree with consumers and have shown their confidence by boosting the DOW even higher. The dollar should go up as full employment increases the amount available for consumer spending. Also major retailers should see increased profits once warm weather returns. Surveys regarding planned purchases show that car sales should go up soon. Watch for stock prices for automobile manufacturers to improve.