The Non-Farm Payrolls (NFP) report released last Friday was the highlight of the entire trading week. The dollar traded with a bid tone up to Friday, only to lose the weekly gains on softer jobs data.
Because all the data up to Friday’s report pointed to improvements in the labor market, many traders were caught on the wrong side of the market. For example, the ADP or private payrolls, showed a strong bounce, as well as the employment components in both the manufacturing and non-manufacturing ISM reports.
Yet, the NFP was soft – the U.S. labor market added only 49k jobs in January. Moreover, the December number was revised to the downside, from the original -140k to -227k. Revisions are always the wild card on the NFP release, as they alone may shift sentiment considerably.
Unemployment Rate Declined to 6.3%
Not everything in Friday’s report was negative. For instance, the unemployment rate declined to 6.3% from 6.7%. Yet, the revision for the month of December was big enough to overcome the positive news given by the unemployment rate.
The problem with the jobs report is that the employment data is lagging the economic cycle. As such, the hope was that a stronger report would signal an economy that already bottomed. That was not the case, as the revisions pointed out. However, the poor jobs data did not stop the stock market from making new highs. All indices ended in green territory as the market focuses more on stimulus and ongoing support rather than on the actual economy.
If we look at some details on the report, we note that most of the jobs (43k) came from the government. Therefore, the data confirms the fact that the U.S. economy, like all advanced economies in the world, is still depending on support from both the central bank and the government. Permanent job losses continue to rise, and there is no end in sight of a trend reversal.
A well-functioning labor market should create jobs on balance – we should see both the private and the public sectors contributing to the gain in jobs. Until that happens, the labor market remains soft and we cannot talk about economic recovery.