Key Points

  • A very strong jobs growth with benign wage pressures unleashed a strong day for the stock market.

  • Other than wage growth deceleration, the details of the report were quite healthy.

  • Tax reform can take some of the credit for stronger goods employment relative to services employment.

In the wake of the release of January’s jobs report—which saw a jump in average hourly earnings—I had our fearless cartoonist Charlos Gary create the visual below, with the headline “Goldilocks may be leaving the building.” Notice that the little bond bear has been awakened (as Schwab’s Kathy Jones has been detailing); but the equity bears are still tucked in their beds—albeit with the non-recession bear keeping a cautious eye on the situation.

Courtesy of last week’s February jobs report though, it looks like Goldilocks may have taken a step back into the building. For those not familiar with the analogy, an economy that’s operating “not too hot, but not too cold” is often referred to as a Goldilocks environment. We have been in such an environment as it relates to economic growth and wages/inflation for much of the current economic expansion. Yet the first market correction in two years was ushered in during the early part of February on the back of the aforementioned hotter wage data in the January jobs report—and the concomitant jump in the 10-year yield to about 2.9%.

Ninth birthday parties are fun

The stock market took it as another reason to celebrate on Friday, which was the bull market’s ninth birthday (using the simple 20% +/- definition for bull/bear markets), during which time the S&P 500 has quadrupled. The muted wage gains for Main Street tend to get cheers from Wall Street because tame wage growth can keep inflation from accelerating and keep a lid on the number of rate hikes by the Federal Reserve.

A devil (and some angels) in the details

Non-farm payroll growth surprised on the upside with a jump of 313,000 jobs—well above the consensus of 205,000; but partly boosted by weather effects. In addition, revisions added an additional 54,000 to the prior two months’ reports. The private-sector/public-sector split was 287,000 and 26,000, respectively; and the largest gains came in the construction, retail (surprise!), and manufacturing sectors. Only the information sector was a jobs loser last month. U.S. companies have added an average of 242,000 jobs per month over the past three months—above 2017’s pace of 182,000. The string of 89 consecutive months of job gains is the longest streak in history.

The recently-passed tax reform has helped to boost both capital spending and job growth; and as a result, goods employment growth (led by manufacturing) has surged to its highest level since 1984. This is in contrast to service employment, which has been decelerating in typical late-cycle fashion.