Barclays economists got mixed signals from Friday’s jobs report.
And now they think the Federal Reserve will raise rates only two times this year, replacing their previous call for three. The Fed expects to hike four times.
On Friday, the January jobs report showed that the economy added 151,000 jobs while the unemployment rate fell to 4.9%.
We also saw some wage growth with average hourly earnings climbing 2.5% month-on-month.
And so even though the headline payrolls number was lower than expectations, wage growth, the unemployment rate, and seasonal considerations made it a solid report overall.
But what sent mixed signals and “confused” Barclays’ Michael Gapen and team, according to a note Friday, was the divergence between manufacturing and services employment.
The services sector, which makes up two-thirds of economic growth, added just 118,000 jobs last month as education-services employment and temp gigs declined. Surveys on the services sector released earlier this week had also shown a slowdown.
The manufacturing sector, however, had a surprisingly strong month, adding 29,000 jobs which was the most since August 2013 despite all its recent challenges.
And it’s because of this split that Barclays has switched their forecast.
The firm writes (emphasis added):
While we have not changed our view that labour markets remain healthy and, in turn, recession risk for the US economy remains low, the weakness in services sector employment in the establishment report is likely to keep uncertainty about the state of the economy elevated. The divergent signals from the two labour market surveys, in our view, mean the FOMC will likely desire to see further evidence to know whether the signal from a strong household survey or a weaker establishment survey is correct.
Now, we’d remind readers that after the market volatility in August, Barclays pushed out their forecast for the first rate hike in a decade to March 2016.
The Fed raised rates in December 2015.
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