What will Fed do with latest data economic data?

Friday, February 20, 2015, Vol. 39, No. 8

The recent weeks have seen a flurry of economic data that shed light on the United States economy.

Here is a recap of two of those data points:

Gross Domestic Product. The first GDP release for fourth quarter 2014 (a data point that will be revised multiple times down the road) revealed an economy that grew by 2.6 percent in the quarter, down sharply from the 5 percent growth registered in the third quarter.

The strong move upward in the U.S. dollar had ripple effects throughout, as consumer spending surged (thank you lower gasoline prices and other imported goods).

On the flip side, the stronger dollar hampered U.S. exports, as foreigners saw the opposite effect of a stronger dollar; namely, it was much more expensive for foreigners to purchase U.S. goods.

This is a net drag on our economy due to trade deficit implications.

Throw in lower capital spending by businesses, and the economy grew by 2.4 percent for all of 2014. Chalk it up to another muddle-through expansion year in this recovery.

Jobs. Last Friday’s employment report revealed a net increase of 257,000 jobs in January. Furthermore, November and December’s initial numbers were revised upward.

As a result, an average of 336,000 jobs were created over the last three months, which is the strongest three-month job print since November 1997 (yes, over 17 years ago).

Despite the job gains, the unemployment rate actually moved higher (from 5.6 percent to 5.7 percent) as more people entered the workforce.

Also, the labor force participation rate increased from 62.7 percent to 62.9 percent, which is one reason the unemployment rate moved higher.

This is healthy for the job market, as the unusually low participation rate throughout this recovery has led many to take every employment report with a grain of salt (in addition to the larger numbers of part-time jobs that are being filled at the expense of full-time).

And average hourly earnings moved higher by 0.5 percent, which is the highest monthly increase since November 2008.

For the past year, earnings are 2.2 percent higher, which is the largest 12-month uptick since August.

Why is this jobs report (and the next) so closely scrutinized? The next Federal Reserve meeting in March is eagerly anticipated.

The Fed’s official dual mandate is to strive for stable prices and maximum employment.

Up until now, wage gains (or the lack thereof) have been a factor in keeping inflation below target. If maximum employment continues to seem more and more like a potential reality than a pipe dream, and if wage inflation finally begins to take hold, it furthers the case for the hawks on the Fed who will be pushing for tightening.

Having said that, we have seen this dance many times before, and multiple factors continue to influence the Fed. Your guess is as good as ours, in terms of what the Fed will do.

However, markets have not waited around to figure out what the Fed will do, as the 10-year Treasury yield is moving back up towards 2 percent.

Sources: Wall Street Journal, Marketfield, Bloomberg

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.