Strong job growth reduces slack further
As expected, the Fed started its tightening cycle in December by raising interest rates by 25 basis points. The Committee however warned that further increases in the federal funds rate will be gradual and depend on the economic outlook. The Fed dots suggest that four rate hikes can be expected this year, which is in contrast with markets’ expectations (which point to only two rate hikes this year). Developments in the labour market and in inflation will be crucial for the Fed’s policy going forward and will decide on the pace of further policy tightening. Ahead of the January 26 and 27 FOMC meeting, we provide you with an update of our Labour Market Dashboard. Despite further positive labour market developments, it is too early to expect a further rate hike already this month.
Payrolls growth accelerated sharply in the fourth quarter of 2015 with 851 000 extra jobs created during the last three months of the year. The unemployment rate however stabilized at 5.0%, only marginally above the Fed’s full employment rate target of 4.9%, but as people are returning to the labour force the downtrend in the unemployment rate might have slowed. Although the headline unemployment rate is close to its target, the broader U6 unemployment rate is still significantly above, pointing to more slack in the labour market than suggested by the headline unemployment rate. Also long‐term unemployment remains relatively high, suggesting that it is difficult for those people to find a new job. Encouragingly, the participation rate picked up further, as people are returning to the labour force, although the pick‐up remains very limited for now, probably hindered by structural factors. Finally, also encouraging news from the wage data. Wage growth is finally starting to accelerate, albeit slowly and remains well below the Fed’s target of 3.5% Y/Y. The JOLTS job report remained strong in November, but the high number of job openings fails to really boost hiring further.
A quick look at the table below confirms that most recent labour market data were encouraging. From our ten indicators, four improved compared with the month before, five stabilized and only one (the long‐term unemployed share) weakened. Three indicators (payrolls, job openings rate and lay‐offs rate) have now met our self‐defined target. Of the remaining seven indicators, three are very close to our target (unemployment rate, hires rate and quits rate). Looking at the remaining four, three (U6 unemployment rate, long‐term unemployed share and average hourly earnings) are definitely moving in the right direction. Only the participation rate fails to really pick up, but this is due to demographical factors. While there is still some slack in the US labour market, at the current pace of job growth, it is diminishing rapidly.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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