The Employment Report: Strong, Solid, or just Dull?

The report was weaker than expected. However, nothing in this report will cause the Fed any concern about their prevailing view of the economic picture in the US.

Lower than expected jobs numbers were met by expected hourly earnings growth. What matters is that the predominant view at the Fed [although misguided] is that the economy is at or below the level of employment that keeps inflation in check.

The charts depict what has been going on for the past two years, coinciding with the period the Fed became more obstinate about tightening.

The top chart shows that during the first 10 months of 2017, unemployment fell because while the employment population ratio (EPOP) increased somewhat, labor force participation (LFPR) remained stable. Once EPOP stabilized and moved in tandem with the LFPR, the unemployment rate steadied.

The middle chart shows that during the two-year period, wage growth remained stable (no trend). The last chart shows what must be to the Fed a surprising outcome. While the unemployment rate dropped, inflation also fell.

Bottom line: If the FedĀ“s worries are misguided, misplaced or plain wrong, decisions based on them will most likely be inappropriate. The markets revealed its views. The dollar and stocks fell while long bond prices rose (yields fell). Yield spreads remain on a tightening trend.

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