Daily Insight – Payrolls seal March taper

by: Peter de Bruin

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  • Nonfarm payrolls were slightly better than expected, despite unusually cold winter weather
  • We continue to think that the labour market will regain momentum as the weather normalises…
  • …while consumption should also benefit from strong gains in household wealth

Payrolls not as bad as feared, despite bad winter weather

Nonfarm payrolls rose by 175K in February, which was better than the consensus forecast of a 149K gain in employment. Indeed, the numbers were not as bad as feared following the soft ADP data and the employment sub-index of February’s ISM services report, which plunged below its boom-bust mark. What is more, January’s gain in nonfarm payrolls was revised to 129K (from 113K), while December’s gain in employment was now estimated at 84K (instead of 75K, initially), putting the 3M average increase of employment at 129K. Encouragingly, the better-than-expected rise in employment happened against a background of the labour market trying to cope with unusually adverse winter weather. Indeed, the Bureau of Labour Statistics’ measure of people not at work due to bad weather surged to 601K, which was the highest February reading since 2010 (when nonfarm payrolls fell by 50K), while the workweek edged down from 34.3 to 34.2 hours. More positively, hourly earnings rose by 0.4%, bringing the year-on-year growth rate to 2.2% in February, up from 2.0% the month before, and suggesting that wage pressures are slowly starting to build. Finally, the unemployment rate, which is derived from a different survey than the nonfarm payrolls (i.e. the Household Survey) rose to 6.7% from 6.6%, as an 264K inflow in the labour force was not matched by a 42K gain in household employment.

Fed set to keep tapering its QE programmes

In terms of monetary policy, we think that Friday’s report will confirm the FOMC’s sense that the labour market is continuing to recover gradually. Indeed, the fact that nonfarm payrolls held up reasonably well despite the cold weather, in our view, bodes well for a stronger labour market recovery once the weather normalises again. As such, we expect the Fed to reduce its asset purchase programmes by another $10bn during its March meeting.

Labour market set to regain momentum…

Indications of a stronger labour market recovery could already be seen in the initial jobless claims report, which covered the week ending the first of March. Indeed, jobless claims fell by 26K to 323K, which marked the lowest level in 3 months. While the initial jobless claims series are notoriously volatile from week to week, we think that part of the drop in claims can be explained by the unwinding of weather effects, suggesting that other labour market indicators should soon start to improve as well.

…while households should also benefit from firm wealth gains

Consumer spending should benefit not only from an improving labour market, but also from strong gains in household wealth. Indeed, according to the 2013Q4 Federal Reserve’s Financial Accounts report (the report formerly known as the Flow of Funds), households assets rose by $3 trillion in the fourth quarter of last year and by around $10 trillion over the year as a whole (amounting to an impressive 60% of GDP). This mostly reflected the strong gain in the US stock market that we saw last year, which boosted the value of households’ holdings of equities and pension funds, as well as firm gains in house prices. Meanwhile, households’ liabilities rose only modestly by $158 billion in 2013, as gains in consumer credit were partially offset by a drop in mortgage debt. As a result, the strong wealth gains brought the ratio of net worth to disposable income to 639.1%, the highest value since 2007Q3. This suggests that the health of households’ balance sheets continues to improve. Indeed, the strong gains in net worth that we saw last year will reduce the necessity of households to save. There should therefore be more room for the savings rate to decline, allowing a greater share of income to be consumed.