January Payrolls Report And Gold

The U.S. economy added 151,000 jobs in January. What does it imply for the Fed policy and the gold market?

The Pace of Hiring Slowing Down

Total nonfarm payroll employment rose by only 151,000 in January, according to the U.S. Bureau of Labor Statistics. Therefore, the pace of hiring in the U.S. slowed down significantly compared to job gains of 262,000 in December. Importantly, the recent job gains were much lower than expected (188,000). The smaller-than-expected increase could add to growing worries about the U.S. economy’s health. On Friday, U.S. stocks closed lower, while the price of gold rose (although it initially declined after the release of the employment report). Additionally, the change in total nonfarm payroll employment for November and December combined was revised down by 2,000.

Interestingly, job gains occurred in several industries, led by retail trade, food services and drinking places, health care, and manufacturing, which added 29,000 jobs in January. Employment declined in private educational services, transportation and warehousing, and mining. It is a bit surprising given the fact that the U.S. manufacturing sector is unofficially in a recession and factory orders are collapsing, while the U.S. service sector is allegedly flourishing. It means either that the weakness is shifting from the manufacturing sector into services, or that the data on the employment situation is inaccurate.

Signs of Strength

However, there are also some signs of strength. The unemployment rate decreased slightly from 5.0 percent to 4.9 percent, while the average wage paid to workers jumped 0.5 percent in January to $25.39 an hour (and 2.5 percent from a year ago). There was an uptick in the participation rate from 62.6 percent to 62.7 percent while the average workweek rose by 0.1 percent to 34.6 hours in January. Therefore, more people are coming into the workforce, more people are getting jobs and they work longer and for higher wages. The rise in hourly earnings, which may indicate some inflationary pressure, offers support for the next Fed hikes. However, earnings could be boosted by state-level minimum wage hikes implemented since 2016. The minimum wage was increased by 14 states and several cities. The new average minimum wage across the 14 affected states rose from $8.50 an hour to just over $9. The rise in the minimum wage increased average wages at the expense of the pace of job gains in the future. Moreover, the positive effect of the minimum wage increase should be one-off and wage growth should normalize in February when the base will already reflect higher minimum wages.

Conclusions

The bottom line is that the January Nonfarm Payroll was mixed or even slightly hawkish for the Fed. The pace of hiring tapered off in January, but the U.S. economy is still gaining new jobs and continues to approach full employment. The unemployment rate edged down while the average earnings increased. However, investors did not like the report. The odds for a Fed hike in March 2016 dropped after the report was released. Gold futures rose on Friday, despite born-again strength in the U.S. dollar.

The mixed picture will not alter the Fed’s stance. The U.S. central bank will wait for more data to see the underlying trends in the labor market. We remain skeptical about the health of the labor market suggested by the official data (for example, the payroll survey double-counts many workers who have few part-time jobs, since three part-time jobs count as three jobs). Therefore, we believe that sooner rather than later it will become obvious that the U.S. economy and labor market are not as strong as it is commonly believed. Such discovery should, of course, support the price of gold.

Arkadiusz Sieron