Is Good News Bad or Good?

On Friday, January 4, we received good news in the form of a strong payroll growth number. At least temporarily. Soon after the announcement, investors began worrying about the more than 300,000 jobs created in December as a harbinger for higher interest rates in 2019.

You see, investors had begun to believe that the Federal Reserve would halt its hikes due to the prospect of more sluggish economic data as we move into the new year. Of course, a payroll number that was well above estimates doesn't fit well with that narrative. When investor sentiment turns negative, as it did in October, all news, good or bad, is viewed as bad. The reality is likely that investor sentiment had turned too negative.

Payroll Data

The January 4th jobs report from the U.S. Labor Department showed that there were 312,000 jobs created in December of 2018. This was well above the estimate of 176,000 and left the average payroll growth in 2018 around 220,000 jobs per month. In addition, the unemployment rate rose to 3.9%, a very low level, due to more people entering the labor market. In other words, as the labor market strength improves, people who are at the edges of it begin to look for jobs and are thus counted in the labor force. This led to an increased participation rate of 63.1%—still a long way from previous highs near 69%.

Equally as important as new entrants to the labor force, the data showed that wages grew at an annual pace of 3%. This higher level of income growth, coupled with lower taxes for many and cheaper gas (I noted $1.94 at the pump last weekend), should account for stronger personal consumption as we move into 2019.