Is the U.S. Jobs Report too Bad to Be True?

© Reuters.

Investing.com - For traders obsessed with job creation as a reflection of the American labor market, Friday’s release of the monthly employment report was a dismal message for the U.S. economy. But if cooler heads prevail, one-off data with a background of escalating wages could well paint quite another picture for Federal Reserve policymakers struggling to stay on hold.

“Yes, only 20,000 jobs were added in February, but please do not start freaking out about a recession. One month does not make a trend,” Heidi Shierholz, director of the Economic Policy Institute, said.

She explained that harsh weather contributed to weakness in February with depressing job growth in construction, hotels and restaurants and noted that average job growth for the last three months was 186,000, “a much better reflection of underlying trends”.

James Knightley, ING chief international economist, also put into question Friday’s report. “While the U.S. economy is clearly facing some headwinds, this report seems very odd since it completely contradicts other evidence such as the ISM employment indices, the ADP (NASDAQ:ADP) report and the NFIB jobs number,” he said.

In any case, a long expansion in the American labor market has been reducing slack, providing less and less room for further job creation in an economy that is near full employment.

That is starting to be felt in wage growth which the Fed is closely watching as it keeps open the possibility of a rate hike in the second half of the year.

Average hourly earnings rose 0.4% on the month, above forecasts for a 0.3% rise, and by 3.4% on an annualized basis, its highest in 10 years. For most of the expansion, wage increases have lagged an otherwise healthy labor market.

Former New York Fed president William Dudley warned earlier this week that investors should not assume the pause in policy tightening meant that the U.S. central bank was done raising rates.

“People should be careful about jumping to such conclusions. Although the Fed is likely to stay on hold for the next few months, after that it’s anybody’s guess,” he wrote in an opinion piece for Bloomberg published on Wednesday.

Using Dudley’s “few months” as a guideline, that leaves the U.S. central bank three meetings - March 20, May 1 and June 19 - to keep an eye on developments, including the progress on U.S.-China trade negotiations, the global slowdown and an increasingly tight labor market stateside.

Knightley in the meantime emphasized his call for one more Fed rate hike this year, noting the solid health of Corporate America, potential for the global growth outlook to improve if the U.S. and China resolve their trade dispute and the increase in inflation pressures on the back of rising wage growth.

“Consequently, we still think there is a strong case for another interest rate rise this summer, which is clearly at odds with a market pricing the next move as being a cut,” Knightley concluded.