- The September’s nonfarm payrolls report (+248K) adds to data suggesting that the economy will continue to grow above trend. The unemployment rate fell to 5.9%, a six year low.
- The labour market data strengthen the case for a Fed rate hike in June 2015.
Job growth picks up in September
Job growth showed a solid reading in September. Nonfarm payrolls increased by 248K, following upward revisions in the past two months of 69K. The change in nonfarm payrolls was well above the consensus forecast (215K). Meanwhile, the unemployment rate in the household survey fell to 5.9% in September from 6.1% the previous month. The job recovery has gained force this year. In the first nine months of the year, average job growth was 226K and the unemployment rate declined by 0.8 percentage points in this same period. This data is consistent with recent reports on the labour market, including the ADP National Employment Report and the ISM employment composite index, which point to a marked improvement. The former report suggests that the increase in employment in small sized companies was the strongest (88K). This is a positive signal since the recovery of small firms is essential to lift employment.
Industry breakdown strong across the board
The industry breakdown of the 248K increase in nonfarm payrolls featured an acceleration in the private service sector which increased by 219K. Professional services showed the largest gain at 81K. Meanwhile, goods producing employment increased by 29K, with only a 4K increase in manufacturing, suggesting that there is still room for improvement in this industry, given the positive trend in the employment component of the manufacturing surveys in the past months. The average workweek has been remarkably steady and edged up to 34.6 hours. Average hourly earnings left the year-ago increase in wages at 2.0% – a figure that has been relatively flat in the past months. Given the ongoing tightening in the labour market, wage growth is likely to pick up going forward.
Participation rate continues to decline
Meanwhile the participation rate, which shows the share of working-age people in the labour force decreased 0.1 percentage points to 62.7%. The participation rate, is a closely watched indicator by the Fed’s policymakers. It has been declining as a result of workers retiring and people leaving the labour force due to a weak labour market.The Fed’s dilemma is whether loose monetary policy will bring these workers back to the labour market or whether additional easing will only encourage inflation pressures. We think that retired workers leaving the labour force is the key driver of lower participation rates, since a measure of unemployment that partially takes into account worker discouragement, the U6 report, fell to 11.8% in September from 12% the previous month, its lowest since October 2008.
The labour market data makes a rate hike in June 2015 more likely, which is more or less what the FOMC members have been signalling and in line with our forecast. The past stronger nonfarm payrolls reports and the fall in unemployment numbers already resulted in a more nuanced tone from the more cautious members, including the Chair of the Fed. Some FOMC members even judge that the progress already achieved in the labour market as “sufficient“ to warrant a change in policy”. Other members are, however, still concerned about the sluggish wage growth and low inflation, but we expect that the strong labour market will give sufficient support for the economy to grow above trend and to push wages up. This should shift the more dovish members to a more hawkish stance over the coming months.