Popular Economics Weekly
Economists are almost unanimous that the Fed will raise their short term rates at next week’s FOMC meeting. This is because total nonfarm payroll employment increased by 235,000 in February, and the unemployment rate fell slightly to 4.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment gains occurred in construction, private educational services, manufacturing, health care, and mining.
This is while Federal Reserve Chair Janet Yellen indicated last Friday that if the economy stays on track for the next few weeks, a rate hike would likely come when Fed leaders meet March 14-15.
“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in a Chicago speech.
It’s now the 8th year of the post-Great Recession growth cycle, with a total of almost half a million jobs in the first two months of 2017, the best back-to-back performance since last summer. The unemployment rate dipped to 4.7 percent from 4.8 percent.
Yet Treasury yields retreated today, even after official data showed that U.S. employers created more jobs than expected in February, but wage growth remained unexpectedly weak. In February, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $26.09, following a 5-cent increase in January.
Over the year, average hourly earnings have risen by 71 cents, or 2.8 percent, which is still not enough to cause substantial inflation, in other words, and that is what worries bond traders that have an almost knee-jerk reaction to any sign of increased inflation. In February, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.86 in February. The yield on the 10-year Treasury note was off nearly three basis points at 2.580 percent in recent trade, while the 30-year yield was down two points at 3.173 percent.
And it’s lower inflation expectations that will keep mortgage rates from rising as well, which means the construction industry—and housing—will continue to boom. Which is why sales of newly built, single-family homes rose 3.7 percent in January to a seasonally adjusted annual rate of 555,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
In February, construction employment increased by 58,000, with gains in specialty trade contractors (+36,000) and in heavy and civil engineering construction (+15,000). Construction has added 177,000 jobs over the past 6 months.
Employment in private educational services rose by 29,000 in February, following little change in the prior month (-5,000). Over the year, employment in the industry has grown by 105,000. Manufacturing added 28,000 jobs in February. Employment rose in food manufacturing (+9,000) and machinery (+7,000) but fell in transportation equipment (-6,000). Over the past 3 months, manufacturing has added 57,000 jobs.
Health care employment rose by 27,000 in February, with a job gain in ambulatory health care services (+18,000). Over the year, health care has added an average of 30,000 jobs per month.
And mining employment increased by 8,000 in February, with most of the gain occurring in support activities for mining (+6,000). Mining employment has risen by 20,000 since reaching a recent low in October 2016. Employment in professional and business services continued to trend up in February (+37,000). The industry has added 597,000 jobs over the year.
So economists and bond traders don’t seem to agree with Yellen’s Fed and the inflation hawks, which is why longer term interest rates, and bond yields shouldn’t rise substantially this year. There just isn’t enough inflation to justify more than one Fed rate hike in 2017. Time will tell, of course, as will any substantial rise in the budget deficit due to increased federal spending.
Harlan Green © 2017
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen