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February
2
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Week In Review

Employment

Nonfarm payrolls rose by 200,000 jobs in January, exceeding the consensus estimate of 160,000. The unemployment rate was unchanged at 4.1%. Average hourly earnings increased 0.3% during the month and have risen 2.9% over the previous twelve months. The labor force participation rate remained at 62.7%.

Our Take

The jobs report was better than expected. Wage gains were particularly impressive, as it has been over eight years since annual wage growth rose 2.9%. As wage growth often drives consumption growth, a continuation of solid gains along with increased employment would signal continued economic improvement.


The Fed

This week, the Federal Reserve Open Market Committee (FOMC) met for the last time with Janet Yellen as Fed chairwoman. After the meeting the committee announced its decision to maintain the federal funds rate at the current target of 1.25% to 1.50%. Since the December meeting, data indicates the labor market continued to strengthen and economic activity continued to rise at a solid rate. The committee noted that household spending, business fixed investment, and employment gains have been solid as well. Inflation continues to run below the committee’s 2% longer-run objective.

Our Take

Unemployment is low, growth is solid, and inflation remains muted. Expectations are for three rate increases this year, with the first coming as soon as the committee’s March meeting.


Municipals

An Illinois advocacy group, the State University Annuitant’s Association, presented a pension funding plan to state lawmakers in Springfield this week. Runhuan Feng, a University of Illinois mathematics professor, presented a model that calls for borrowing $107 billion dollars by issuing taxable 27 year bonds and placing the proceeds directly into the underfunded state pension system. Professor Feng stated that the state can borrow money at a 5% rate, invest in the pension funds, and receive a rate of return of 7% over time.

Our Take

Illinois lawmakers, along with Governor Bruce Rauner, expressed skepticism about Professor Feng’s plan. A $107 billion debt issue would be the largest debt sale in municipal bond history. Critics expressed uncertainty that a deal of that size could be sold to the market at a 5% rate, or that a 7% rate of return would occur, especially if economic conditions weaken. Additional borrowing should not be the solution for Illinois’ pension problems. Governor Rauner and Illinois lawmakers must make meaningful pension reform a priority.