The U.S. economy entered the New Year with a strong gain in payroll employment and the lowest unemployment rate since 2001. According to the Employment Situation for January 2018 reported by the Bureau of Labor Statistics (BLS), total nonfarm payroll employment rose by 200,000 in January and the unemployment rate was unchanged at 4.1% for the fourth consecutive month.
Today’s release provides additional support to higher short-term rates. A previous post illustrated that employment growth directly impacts economic production and stronger growth in the actual economy would widen the output gap, actual economic growth would further exceed the economy potential rate and enlarge the positive difference between actual GDP and potential GDP. NAHB analysis has illustrated that the Fed raises its key short-term policy rate, the federal funds rate, under these conditions. Short term market rates track the federal funds rate.
At the same time, the unemployment rate remained unchanged at 4.1%. However, it remains below the Congressional Budget Office’s estimate of the long-run natural rate. While the relationship between the labor market and inflation has likely flattened, today’s release indicates that earnings growth accelerated. Although earnings growth remains below rates recorded 10 years ago, the higher earnings growth could accelerate inflation (and possibly personal consumption spending) which, if reflected in expectations, would push up longer term rates. The figure above indicates that growth of average hourly earnings is at its higher rate since the end of the recession. In sum, today’s release confirms that the Fed is very likely to raise the short-term policy rate and it suggests that the yield curve, the difference between longer term rates and short term rates, could steepen.
Monthly employment data released by the BLS Establishment Survey indicates that construction added 36,000 jobs in January, the largest growth in the past ten months.
Meanwhile, residential construction employment rose by 19,000 in January, after an 18,700 increase last month. The December increase was revised from its original estimate of an 18,200 increase. Residential construction employment is now 2.77 million, broken down as 772,000 builders and 2 million residential specialty trade contractors. The 6-month moving average of job gains for residential construction is 13,967 a month. Over the last 12 months, home builders and remodelers have added 88,400 jobs on a net basis. Since the low point following the Great Recession, residential construction has gained 786,000 positions.
In January, the unemployment rate for construction workers rose to 5.5% on a seasonally adjusted basis, slightly higher than a 5.3% last month. After reaching a peak rate of 22% in February 2010, the unemployment rate for the construction sector has been steadily declining and remains historically low.