US Watch – US payrolls up, wages down

by: Maritza Cabezas

The US labour market report was mixed in February.  Nonfarm payrolls rose by 242K; the unemployment rate was unchanged at 4.9%, but that reflected a rise in labour force participation.  On the other hand, wage growth contracted by -0.1% after a 0.5% mom gain. We continue to expect the Fed to keep rates on hold this year.

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Mixed US job market report

The February labour market report was mixed but the strong job growth should alleviate concerns that the US economy could be falling into a recession.  Employment increased 242K last month, up from a revised 172K. This was much higher than the consensus estimate of 195K. The unemployment rate remained unchanged at 4.9%. This occurred against the favourable backdrop of a labour force participation rate which has been slowly trending up to 62.9% and a fall in the part-time employed for economic reasons which fell to 9.7% from 9.9% in January. The more negative side of the report was the fall of average hourly earnings by -0.1% mom.

 

Goods sector shows weak hiring, while service sector posted strong employment

Turning to the details of the report, these were also mixed. Hiring in the goods-producing sector showed that manufacturers have been laying off workers (-16K), after several months of modest hiring, while the construction sector continues to add jobs, albeit at a modest pace (19K). Meanwhile the service-producing activities showed strong growth (245K), mainly professional business services.

 

Wage growth contracts

The labour market continues moving towards full employment, but wage growth remains sluggish. It is not easy to reconcile a tight labour market and falling wage growth. The annual increase of 2.2%, followed 2.5% growth in January. If we look at other measures of wage growth, which are calculated using different data sets and methodologies, we see that wage growth has been hovering around 2% yoy since the global recession and that there is not really a persistent upward trend. We think that subdued wage growth is a result of the low productivity in the labour market, particularly in the service sector. On top of this there could be more slack in the labour market than we think. Finally, there could be pressure on US wage growth resulting from subdued global wage growth.

 

us wages

 

Will we continue to see strong job growth in the coming time?

The US economy is showing clearly that it is not on its way to a recession. However, modest growth as we have seen in the recent quarters is not consistent with this strong pace of hiring. We expect firms to start economising on labour as the job market continues to tighten. The combination of subdued productivity gains and rising wage growth will likely squeeze profit margins. These are still at high levels though, suggesting that there is room for some compression without having a dramatic impact on employment growth.  On top of this although market sentiment has improved with better than expected incoming data, much of the uncertainty in global markets which sparked fears earlier this year remain. Indeed, the slowdown in emerging markets is ongoing and global manufacturing continues to weaken and with it global trade. Moreover, the extent of central bank divergence is also uncertain. The ECB and BoJ are expected to provide further monetary easing in the coming time. This will result in additional tightening of financial conditions through a stronger US dollar. Tighter financial conditions has been a concern for Fed policymakers.

 

Fed likely to adjust interest rate outlook

In the March 15-16 meeting, we expect the Fed to keep interest rates on hold and to adjust the dot plot which signals the interest rate projections of Fed members, showing less rate hikes than the four hikes initially expected. Although Fed members are trying to avoid giving the impression that they have a predetermined mind-set with respect to hikes, they have been emphasising the tightening of financial conditions observed since the beginning of the year as one of the reasons to be cautious about further rate hikes.  We expect the Fed to remain on hold in coming months, primarily because of concerns about the global economy and the impact on financial conditions, as well as low US inflation expectations.