INDICATOR: January Employment Report, Manufacturing Activity and Consumer Sentiment

KEY DATA: Payrolls: 304,000; Private: 296,000; Revisions: -70,000; Unemployment Rate: 4.0% Wages: +0.1%/ ISM (Manufacturing): +2.3 points; Orders: +6.9 points/ Consumer Sentiment: -7.1 points

IN A NUTSHELL: “Given the continued robust nature of hiring, maybe Fed Chair Powell should consider rethinking his rethinking of the economy and rate hikes.”

WHAT IT MEANS: Well, the economy appears to be in as good a shape as many economists, but not many investors, thought just a few weeks ago. Remember the market gurus who were talking about the economy heading into recession, well if they see their shadows tomorrow, they better get hiding for at least six more weeks. It is hard to argue that the economy is faltering with job gains so strong. Employment surged in January, though the data are a bit weird. The December robust increase was revised downward by 90,000, so it is now only strong. Still, the three-month average of 241,000 is way above expectations and shows that firms are hiring like crazy. Despite the polar vortex freeze, when no one was out building anything, construction payrolls surged. The late month shutdowns didn’t get taken into account. Also, the federal government added workers, which is a hoot, but technically correct since the government workers will get paid. As for the contract workers, who knows how they were handled? Regardless, there were a lot more people working in January, even if many others weren’t working. In other words, I don’t have a lot of confidence in the report.

On the unemployment front, the rate rose modestly. However, the Bureau of Labor Statistics did its usual adjustments and technically, the December and January numbers are not exactly comparable. And there was some misclassification of the government workers, so don’t even worry about the rate. More importantly, wage gains were surprisingly tame, though over the year they are still accelerating.

A second indication that the economy is doing just fine was provided by the Institute for Supply Management. Its manufacturing index rose in January led by a robust gain in new orders. That caused production to surge, though hiring was a little slower than it had been. The January manufacturing payroll numbers confirmed that.

Meanwhile, the government shutdown led to a sharp drop in household confidence. The University of Michigan’s Consumer Sentiment index cratered in January and dropped below the level posted in November 2016, when Trump was elected. We shall see how that plays out now that the government has reopened, at least for a while. But keep in mind, the drop was likely due to the stupidity in Washington. Political actions don’t usually lead to changes in household spending and that likelihood can be seen in the personal financial expectations index, which held up quite nicely.

MARKETS AND FED POLICY IMPLICATIONS: The markets screamed “A recession is coming, a recession is coming”, but no lights showed from the steeple. It is neither coming by land or by sea. Meanwhile, back in Fed land, the Chair was fretting that additional rate hikes could send the economy into a bigger tailspin, or at least that had to have been his thinking. Why else would you go from three hikes to none in the span of a few months, especially given that the economic data have held up? Remember, the Fed never said it was raising rates to control inflation. It said it was normalizing rates. Well, either the rates are back to normal, which I doubt, or Mr. Powell blinked. Actually, I think he simply shut his eyes. If the Fed wants to normalize rates, it needs about three more increases and if it doesn’t get going, who knows if it will have the strong data to reach the so-called “neutral” promise land later this year. As for investors, solid growth, inconsistent but generally decent earnings and a Fed on the sidelines should be taken as good news.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.