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March 03, 2016 at 06:03 AM
To withstand headwinds from slower global growth and continued financial volatility, Friday’s U.S. employment report for February will need to show continued robust job additions, higher wage growth and a labor participation rate that is edging up. This is also what the markets require over time, even if it means an even more confusing picture for policy makers at the Federal Reserve and the financial volatility that could ensue.
A figure of 150,000 or more added jobs would consolidate an impressive two-and-a-half-year run in employment creation that has helped to reduce the most commonly followed jobless rate to 4.9 percent — a drop of more than half from its post-crisis high — and that has made the U.S. one of the world’s leading job-creation engines.
This impressive growth in jobs has generally not translated to meaningfully higher wages, at least until now. The jobs report for January, released last month, suggested that this may be changing. Confirmation of this improvement in pay, along with a gradual recovery in the labor participation rate, is essential: It would lead to higher consumption to anchor a U.S. economy that invests more and whose internal momentum is sufficient to overcome a decelerating China, muted European and Japanese growth as well as adverse contagion from recent bouts of financial market instability.
Fed officials also will be hoping for this favorable trifecta from Friday’s report, albeit at the cost of making their short-term policy decisions even more delicate and finely balanced. Specifically, broadening labor-market improvements would encourage the central bank to continue with its careful process of monetary-policy normalization, including a couple more hikes of 25 basis points this year — and this notwithstanding a less than supportive global environment.
Stocks, especially at first, may not embrace a Fed that is again on the move. After all, they have grown quite dependent on continued liquidity support from the systemically important central banks around the world (particularly the Fed, the European Central Bank and the People’s Bank of China). But over the longer-term, solid economic and corporate fundamentals will be the drivers that allow U.S. equity markets to maintain their current levels and go higher.
