US labour market: Job growth to make a rebound

Job report preview

• We look for the non-farm payrolls to make a decent rebound in September after last month’s disappointing report. Our models predict an increase of 250,000 (consensus 205,000). We expect the unemployment rate to stay constant at 6.1% (same as consensus).

• There are two main reasons why we look for a robust payroll number: First, most labour market indicators look very strong currently: jobless claim figures are low, the ISM composite employment index is at the highest level since 2005 and the jobs plentiful versus hard to get balance has also continued to rise in the past months. Second, service payrolls have been very low in the past two months despite strong consumer spending and the very high ISM service employment index and we look for a decent rebound here. Part of the rebound will be due to the end of strike activity, which we estimate will pull up the change in payrolls by around 35k relative to the August number. Due to strikes payrolls in the food and beverage industry fell 17k in September versus an average of +5k over the past two years. In October we look for it to increase 18k as workers are back at work.

• Wage growth also continues to be a focus point as it is an important input to the Fed’s inflation outlook. The wage growth has been subdued for some time now and we have yet to see the improvements in the labour market being reflected in the wage levels. However, indicators such as time to fill vacancies indicate that wage pressure is gradually building up.

General condition of the US labour market

• The US labour market has tightened over the past years with the unemployment rate at 6.1% closing in on the Fed’s long run estimate of a natural unemployment rate (NAIRU) of around 5.4 %.

• Increases in non-farm payrolls are averaging 226,000 m/m over the past six months indicating that the US labour market is generally improving and in a better condition than reflected in the August report.

• However, the overall picture of the US labour market is not unambiguous as a range of other indicators suggests that there remains significant underutilisation of the labour resources as underlined by the Fed. The U-6 unemployment rate is still at a high level and many are only working part time for economic reasons. As the unemployment rate moves closer to the Fed’s estimated natural level of 5.4%, attention will turn towards utilisation indicators and the development of these will be crucial for when the Fed will start raising the short-term rates.

• We expect payrolls to grow around 250-300k in coming quarters and unemployment to hit the NAIRU rate of 5.4% in Q2 next year. Based on this we look for the Fed to deliver the first rate hike in April 2015.