- The November nonfarm payrolls report (+321K) showed that employers ramped up hiring. The unemployment rate was unchanged at 5.8% which is below the Fed’s end of year forecast. Both indicators suggest that the economy is making fast progress towards maximum employment.
- The labour market data strengthen the case for the FOMC to drop the “considerable time” phrase this month and for a Fed rate hike in June 2015.
Strongest monthly job gain in three years
Employment gains have been moving at a faster pace than the Fed or markets expected. US nonfarm payrolls advanced by 321K in November, following an upward revised gain of 243K the month before. The revisions in the past two months added 44K jobs. The change in nonfarm payrolls was far above the consensus forecast (230K). The unemployment rate in the household survey was unchanged at 5.8% in November. Looking at the details the service providing sector saw strong gains in employment, particularly transport (+71) and temporary help (+23). This is partly explained by jobs related to the holiday shopping season and courier deliveries. But in general the report was broadly strong in terms of hiring, even in the sectors which are usually softer, including construction (+20) and manufacturing (+28).
Labour market more dynamic
Other details of the report showed that measures that are closely watched by Fed officials are gaining more dynamism. The underemployment measures, including people who are working part time for economic conditions, dropped to 11.4% in November from 11.5%. Meanwhile, average hourly earnings which have been sluggish, increased to 2.1% up from 2% and 0.4% in November alone. The labour market is now showing tighter conditions which should spur wage growth. A less bright spot in the report was the participation rate, which shows the share of working-age people in the labour force. It was unchanged at 62.8%, a level still fa below the long-term average of 65.4%. This low ratio is a result of workers retiring and people having left the labour force in the past due to a weak labour market and not returning. We think tthese retired workers leaving the labour force is the key driver of lower participation rates given that measures of discouraged workers are improving.
Lower oil prices and the labour market
We think that lower oil prices will support stronger growth through the boost to real incomes. This all should result in a positive effect on overall employment. However, the decline in US energy production will also be a negative for energy-sector employment, with negative spillover effects to broader employment in sectors that are particularly reliant on energy production. We nonetheless think that the net of these two factors is a positive. In the past years energy jobs have grown much more quickly than other sectors since the labour market trough but have nonetheless accounted for only a modest share of total job growth.
Fed officials more optimistic on labour market
In the FOMC minutes released in November, Fed officials agreed that the US labour market had made steady progress. They mentioned that underutilisation in the labour market was gradually diminishing. In the past few days, Vice Chairman Fischer suggested the Fed is getting closer to dropping the “considerable time” phrase in the FOMC statement, the forward guidance used to signal that rate increases are still far. Moreover other Fed officials have been signalling more confidence in the economy lately. We think that employment gains have been making faster progress than Fed officials expected. Since October the unemployment rate of 5.8% has been below the central tendency projections of the FOMC, which are at 5.9% – 6% in the fourth quarter of 2014. All this makes it more likely that the Fed will drop the “considerable time“ phrase in the next meeting in December 16-17.