Overview: The major economic data released over the past week was a good deal better than expected. Both the labor market and the key services sector posted surprisingly strong results. This raised future inflationary pressures, so mortgage rates ended the week higher.
Recent comments from Federal Reserve officials have clearly pointed to tightness in the labor market as a potentially major trouble spot in the fight against inflation. As companies compete to hire employees, they may be forced to increase pay, which is great for workers but generally leads to higher inflation. The highly anticipated Employment Report released on Friday amplified those concerns. The economy gained a massive 517,000 jobs in January, far exceeding the consensus forecast of just 185,000. The gains were widely distributed across a range of sectors with particular strength seen in leisure, hospitality, professional services, and healthcare. The unemployment rate unexpectedly fell from 3.5% to 3.4%, the lowest level since 1969.
While hiring's posted blowout figures, the current trend in wages is still going in the downward direction hoped for by Fed officials desperately trying to fight inflation. Average hourly earnings, an indicator of wage growth, were 4.4% higher than a year ago, matching expectations. While this remained far above the annual rate of increase typically seen prior to the pandemic, it was the smallest since August 2021.
Another significant economic report released over the past week, from the Institute of Supply Management (ISM), also far surpassed the anticipated results. The ISM Services Index jumped to 55.2, well above the consensus forecast of 50.5. Levels above 50 indicate that the sector is expanding. The services sector, which includes a wide range of industries such as banking, software, and hospitality, accounts for roughly 80% of U.S. economic activity.
Job Gains (thousands)
Consumer Price Index (CPI)
Retail Sales report