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The Fed may be in a pause but U.S. labor market growth is not

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      By Andrew Szczurowski, CFA, Portfolio Manager, Global Income Group, Eaton Vance Management

      Boston - The U.S. labor market continues to shake off all the political and market volatility, adding an impressive 304k jobs in the month of January. The headline job growth in January topped almost all economist estimates, which were all over the map due to the government shutdown. The positive employment growth in January also means the U.S. economy has now added jobs for 100 straight months, which is truly remarkable.

      As a technical side note, the government shutdown distorted the household payroll survey, which the unemployment rate is based off of, which is why there was a spike in the underemployment rate from 7.6% to 8.1%. The establishment survey still counted the furloughed workers, because they were to receive back pay, so they were still counted in the headline jobs number. There were however potential establishment survey distortions from contractors who worked with the Federal government and were temporarily unemployed.

      Getting to the details of the report:

      The unemployment rate rose from 3.9% to 4.0% due to the government shutdown and an increase in the participation rate. This decline should be reversed next month, so the Fed will look past it.

      Average hourly earnings rose .1% MoM and 3.2% YoY. With more job openings in their country than people looking for work, employers will likely have to continue to raise wages to attract talent.

      The one negative in the report was the 90k downward revision to the December payroll report, but even after the revision, it was still a 222k gain. For the last three months the U.S. Economy has averaged 241k job additions per month.

      The construction sector posted an impressive 52k job gains in the month of January. 34k of those construction sector job gains were specialty trade contractors, which there is seemingly a shortage of across the country.

      Bars and restaurants also continued their hiring spree, adding 37k job gains in January. Last but not least, in what seems like deja vu, the healthcare sector added 42k jobs in January, continuing its impressive run.

      Bottom line: The Fed is leaving autopilot mode and focusing more on the data, as they should. While the Fed might have turned dovish due to the political uncertainty and market volatility, if those uncertainties are subsiding and we continue to get strong economic and payroll data, we haven't seen the end of this hiking cycle. For now the Fed bowed to risk markets and went into a pause. Keep an eye on the inflation and wage data over the coming months, which could put the Fed back in play as we approach the summer.