Job market shows muscles to the Fed

by: Maritza Cabezas

150206-US-Employment-February.pdf ()
  • The January US nonfarm payrolls report showed solid gains of 257K after an upward revised 329K the previous month. Wage growth rebounded strongly, to 0.5% mom from -0.2%. The unemployment rate edged up to 5.7% from 5.6%, as a result of an increase in the civilian labour force.
  • The rise in disposable income resulting from lower oil prices and higher wages should give a boost to US consumers, putting some upward pressure on core inflation before long.
  • In their most recent FOMC statement, Fed policymakers showed that they were more positive about the US economy. This strong job report offers support to this view and should open the door for a rate hike in June 2015.

Job market continues to show steady hiring

Januarys’ employment report confirms the solid recovery of the US labour market. Nonfarm payrolls showed broad gains of 257K. This is the eleventh month of job gains above 200K. Data for November and December were revised upward to show an increase of 147K more jobs. The unemployment rate edged up to 5.7% from 5.6%, but as a result of an increase in the civilian labour force.  In fact, the participation rate, which increased to 62.9% up from 62.7%, indicates that more workers are returning to the labour market. Looking at the details, retail trade posted the largest gains, adding 46K jobs. But other sectors which have had more difficulty in recovering, including construction and manufacturing, continue to show signs of improvement. In contrast, jobs in oil and gas extraction, declined by almost 2K, as a result of the cost cutting efforts that the industry is facing due to lower oil prices.

Wages rebound confirming tightening of labour market

This report suggests that we are at a turning point for wage growth. Up to now, unemployment has been falling rapidly but wage growth had been a bit sluggish. In January wages rebounded strongly to 0.5% from -0.2% the previous month. Historical data suggest that when the unemployment rate falls to below the 6% threshold, wage growth accelerates. We expect that a tighter labour market will result in modest, but steady wage growth in 2015. Surveys of small businesses suggest that they plan to increase compensation in the coming months.

Job report strengthens expectations for rate hike in June

Fed policymakers have been quite positive about the US economy. Indeed, FOMC members describe the economy as expanding at a “solid” pace with “strong” gains in employment. The Fed’s central tendency projections for unemployment are 5.2%-5.3% at the end of 2015. Our forecasts indicate that unemployment will continue to decline this year to around 5% at year-end. We expect that a rise in disposable income resulting from lower oil prices and higher wages, should lift consumption and put some upward pressure on core inflation. Members had already announced that even if inflation is well below the Fed’s 2% target in the near term, this should not be an impediment to normalising interest rates, as long as core inflation holds up. We expect the Fed will hike rates in June 2015.