Friday, February 6, 2015
The jobs report reconfirms that the U.S. recovery is for real and here to stay. What this means is that the U.S. economy is more than capable of absorbing the coming Fed tightening cycle, notwithstanding squealing sounds coming from corporate leaders who have had to deal with unfavorable currency movements lately.
This morning’s Bureau of Labor Statistics (BLS) jobs data shows that the U.S. economy created a total of 257K jobs in January vs. estimates of 237K and the prior month’s tally of 329K (which was revised much higher – 329K vs. 252K). The unemployment rate ticked up to 5.7% from 5.6% the month before, reflecting a higher labor force participation rate (62.9% in January vs. 62.7% in December).
Average hourly earnings increased by a better-than-expected +0.5% to $24.75 per hour, likely indicating that this key element of the labor market may have finally started turning. Improved earnings coupled with lower energy costs are giving household’s buying power a big boost, which should start showing up in growth numbers in the coming days.
Any way you look at it, this is a positive labor market reading, which should give the Fed plenty of confidence to start the tightening cycle that it has been guiding investors towards for quite some time. The divergence in the monetary policy stances of the U.S. Fed and the country’s trading partners has been showing up in a stronger dollar, which has been a common negative theme in the ongoing Q4 earnings season. This has prompted a number of corporate leaders, like the former CEO of General Electric (GE) and the current CEO of Caterpillar (CAT), to question the need for monetary tightening in this international backdrop, as it will further weaken their competitive positioning.
My view on this subject is that given how long interest rates have remained at this low level, it makes perfect sense for the Fed to start building some (interest rate) cushion before the next crisis hits – they simply don’t have the traditional monetary policy tool of interest rate cuts in the present environment. As this morning’s jobs report reconfirms, the U.S. economy is strong enough to easily withstand a well-telegraphed slow increase in rates, irrespective of what short-term impact that has on the dollar exchange rate and corporate profits.
While on the subject of corporate profits, it makes sense to provide a quick scorecard of the Q4 earnings season. Including this morning’s reports, we now have Q4 results from 323 S&P 500 members that combined account for 75.4% of the index’s total market capitalization. Total earnings for these companies are up +7.1% from the same period last year, with 71.8% beating earnings estimates. Total revenues are up only +1.4%, with 56.7% beating top-line estimates.
Revenue growth in Q4 is weak relative to other recent quarters, and estimates for the current and following quarter are falling at an above-average rate — an overall unfavorable earnings environment for the stock market.
Sheraz Mian
Director of Research
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