- The February nonfarm payrolls report continued to show solid gains of 295K after a downwardly revised 239K the previous month. The unemployment rate fell to 5.5% from 5.7%. Wage growth was the only grey spot, rising only 2% from a year earlier, a slightly slower annual gain than 2.2% in January.
- We expect the Fed will hike rates in June 2015. Fed policymakers showed that they were more positive about the US economy. We do not see faster wage growth as a precondition to Fed tightening, although if wage growth improved this would make the FOMC’s decision easier.
Robust payroll data, despite bad weather
February’s’ employment report confirms the solid recovery of the US labour market. Nonfarm payrolls showed broad gains of 297K. This is the twelfth consecutive month of job gains above 200K. January’s payrolls were revised downward by 18K to show an increase of 239K more jobs. The unemployment rate fell to 5.5% from 5.7%. Looking at the details, leisure and hospitality posted the largest gains, adding 66K jobs. Construction saw a slight slowdown in hiring of 29K compared to the previous month (49K), this could partly be explained by the severe winter weather in the North East. Meanwhile, a stronger dollar is having some impact on manufacturing activity, hiring in the sector remained positive, but slowed down a bit to 8K from 21K.
Wages pull back in February, but wage rise on the cards
Up to now, unemployment has been falling rapidly but wage growth had been a bit sluggish. In February wage growth was up 2% from a year earlier, a slightly slower annual gain than 2.2% in January. On a month on month basis wages grew 0.1% in February, but that followed 0.5% the previous month, suggesting that there could be some payback for the strong wage growth in January. In the past few days, the largest private employer in the US, announced that they will lift the minimum wage. This announcement has already been followed by other large companies suggesting they will do the same. Indeed, we expect that a tighter labour market will result in a modest acceleration of wage growth in 2015.
Fed’s view: employment broadly improving…
Fed policymakers have been quite positive about the US economy. During Chair Yellen’s testimony before the Senate, she mentioned that the employment situation was improving in many dimensions. She was positive about the unemployment rate and the pace of monthly job gains. She mentioned that long-term unemployment had declined substantially and labour market opportunities had recovered to pre-recession levels. Only the participation rate and wage growth had room for improvement.
…case for extensive “patience” is loosing ground
With the labour market on solid footing, FOMC members 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. Several FOMC members (Mr. Fischer, Mr. Williams and Ms. Mester) have said lately that they are of the view that the Fed should not wait too long to raise interest rates, since a late rate hike could force the Fed to be more aggressive in its tightening after the lift-off. FOMC member Dudley, however, has had a more dovish tone and has suggested that raising interest rates too late is safer than acting early.
Our view: Fed’s mid rate hike target in place
We expect the Fed will hike rates in June 2015. We do not see a higher participation rate or faster wage growth as a precondition to Fed to Fed tightening, although if these indicators improved this would make the FOMC’s decision easier. Our forecasts indicate that unemployment will continue to decline this year to around 5% at year-end. As for inflation, we expect that a rise in disposable income resulting from lower oil prices and higher wages, should lift consumption, supporting demand. We see, however, some downside risks for lower core inflation in the coming months, which could delay the Fed’s decision to hike rates.