Jeremy Siegel ‘Shocked’ by Strong Jobs Numbers
A strong labor market could push interest rates higher, but it also lowers the probability of a recession.
Wharton School economist Jeremy Siegel was “shocked” by the strength of January payroll data but continues to see significant disinflation in the U.S. economy.
The unexpectedly strong jobs report released earlier this month spurred a near standoff in the stock market, as the data could mean that the economy will perform better than anticipated and that the Federal Reserve may impose higher interest rate hikes, Siegel said early Wednesday on CNBC’s “Squawk Box.”
The government reported a 3.4% unemployment rate for January — the lowest in more than a half century — and that nonfarm payrolls grew by 517,000, far more than anticipated.
“I will admit I was shocked by the strength of the January payroll,” the finance professor said on CNBC. The market will see more data, including the Personal Consumption Expenditures (PCE) report, the Job Openings and Labor Turnover Survey and February payroll statistics, before the Fed’s rate-setting panel meets March 21-22, he noted.
The PCE price index is the Fed’s favorite inflation gauge.
Market Standoff?
Siegel said he thinks Fed Chairman Jerome Powell wants to raise the central bank’s benchmark interest rate by 25 basis points in March, but if February payrolls are as strong as January’s, “fifty is definitely on the table. I don’t think it will be, but certainly January was a shocker in terms of how strong that labor market is.”
At the same time that a strong labor market could push interest rates higher, Siegel added, “it also lowers the probability of a recession. So it is more likely that the earnings estimates are going to be realized than they were before.”
“Stock prices are a fight between the numerator, which is earnings, and the denominator, which is interest rates,” he said. “So the strong payroll report is wow, you know, we could have a strong consumer, we could have the GDP going up much more than the Fed expects, we could have earnings (for the S&P 500 index) really be realized instead of everyone saying, ‘Oh it’s going to go down to $200 or $180.’”
The payroll report indicated the numerator went up, while the Fed might also raise interest rates more aggressively, Siegel noted. “You saw almost a standoff on the stock market,” he said.
He predicted that the PCE report this Friday “will be hot” and that market analysts will say inflation isn’t under control and interest rates are going up. But gas and oil prices, apartment rentals and the Case-Shiller home price index are showing continued disinflation that doesn’t show up in lagging inflation indicators, he said.
“We know that Powell is now acknowledging that [the PCE and CPI] contain lagged data,” Siegel added. “Remember, the Fed only started tightening 11 months ago. To start panicking because (inflation is) not down to 2% in 11 months, I think, is not waiting for the cumulative effect of monetary policy that Powell and the Fed itself has admitted is yet to be felt.”
(Photo: Bloomberg)