Mixed Signals: Jobs Data and Consumer Sentiment

Two of this week’s main data points landed on Friday.

First up, we got the non-farm payrolls report for January. After job creation in December blew away all expectations, investors were nervously awaiting the January data.

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Non-farm payrolls

The data turned out much more benign that feared. The US economy added 143,000 new jobs in January, fewer than the 169,000 forecast. Most of the new jobs were created in health care (44,000), retail (34,000), and government (32,000). A slowdown in the jobs market would generally be seen as a positive in the Fed’s fight against inflation and the prospects for additional rate cuts. As long as the slowdown wasn’t too big, of course.

However, while the jobs creation was slightly disappointing, the unemployment rate painted a different picture by ticking down from 4.1% in December to 4.0% in January. Labor force participation rose by 0.1 percentage point to 62.6%.

At the same time, wage inflation was higher than expected, rising 0.5% for the month and 4.1% from a year ago. The forecast was for 0.3% and 3.7%.

All in all, investors seemed to like the report. The S&P and Nasdaq had been slightly negative before the release but turned positive and continued upward during the first half hour of trading.

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Consumer sentiment

But then we got the latest consumer survey from University of Michigan. And it wasn’t exactly uplifting reading.

Respondents now expect inflation to be at 4.3% a year from now, a big jump up from 3.3% in the January survey. It’s only the fifth time in 14 years that we’ve seen a one-month increase of this magnitude.

The five-year expectations didn’t change much though, so consumers are clearly more worried about the short term, likely due to the impact of Trump’s policies, tariffs and a potential trade war. This also seemed to be reflected in the overall optimism index which fell to 67.8, well below the 71.3 forecast.

The current conditions index also declined, down 7.2% from January to 68.7. It was down 13.5% from a year ago.

The thing about consumer sentiment is that it tends to be a self-fulfilling prophecy. If consumers are concerned about the economy, they’re more likely to pull back on spending and thus hurt company earnings and slow down the economy. Which is what they were worried about in the first place.

A slowdown in consumer spending will likely bring down the inflation as well though, but at what cost?

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Key takeaways

First of all, one survey isn’t enough to draw any strong conclusions. We’ll have to wait and see if the trend persists. A simple shift in Trump’s rhetoric could have a big impact.

If the does persist, however, we need to consider the impact of a cautious consumer. Short-term, a pullback in spending will undoubtedly hurt earnings and the economy. Even if consumers’ inflation fears don’t materialize.

But is such a slowdown exactly what the Federal Reserve needs as the green light to lower rates and kick quantitative easing into high gear? I’m sure Donald Trump, a big proponent of low interest rates and a booming economy, will be quick to suggest this.

If so, the negative impact on the economy and markets may be short-lived. And as soon as the money printer is turned back on, risk assets are ready for another QE-fueled run. That’s at least the optimistic take from an investor perspective. And it wouldn’t surprise me at all.