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What the U.S. Jobs Report Needs to Show

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The U.S. jobs report for January will be released Friday amid unsettling market volatility that is amplifying financial insecurity and could threaten the U.S. economy as it battles the headwinds from weaker international conditions. To reduce the risk, this gauge of the labor market needs to contain three signals:

  1. That the impressive U.S. employment-creation machine, which delivered almost 6 million jobs in the last two years alone, remains healthy and engaged. Given recent data, the newest report would have to show a gain of 150,000 jobs or more in January to achieve that goal.
  2. That wages are rising: Average hourly earnings need to show a monthly gain of 0.2 percent and preferably more, especially after the disappointing flat reading for December.
  3. That discouraged workers are re-entering the labor market and looking for jobs. That would require the participation rate to edge up by 0.2 percentage points from 62.6 percent, along with the employment-population ratio, which stands close to its multidecade low of 59.5 percent. This could cause the unemployment rate to edge up from 5 percent, but there would be positive and productive reasons for the increase.

In combination, these three developments would suggest that the (admittedly tepid) recovery of Main Street remains on track. This is particularly important as the global economy slows and as continued financial market volatility creates the risk that both households and companies will be more risk-averse about spending.

Although the reasons are less obvious, financial markets also need a comprehensively strong jobs report.

Of course, robust numbers could produce some short-term anxiety on Wall Street, given the potential implications for Federal Reserve policy. A jobs report reflecting these three characteristics would do more than dampen speculation that the Fed is about to change course and ease its monetary policy. It would also keep open the possibility of a rate increase in March, which markets fear.

QuickTake Monthly U.S. Jobs Report

Yet without solid economic and corporate fundamentals, investors would quickly find that renewed central bank support alone is not sufficient to create longer-term stock market prosperity. Indeed, it did not take long for global equity markets to give up the impressive bounce they got last week from the surprise decision of the Bank of Japan to follow the European Central Bank and set a negative policy rate.

Although the markets have been conditioned to expect repeated liquidity injections from central banks, what they really need is improved fundamentals that validate existing asset prices and push them higher. Data showing these three areas of strength in the labor market is an essential condition for creating those conditions, particularly given the important role of consumption as a driver of the U.S. economy. Without such strength, and with economic and financial fluidity abroad, investors would soon realize that continued central bank policy experimentation alone is a poor substitute for durably solid fundamentals.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net