US: Wage inflation surprised on the upside as employment growth slowed somewhat

In our view, the jobs report was mainly to the better side although the headline was weaker than expected. Employment grew by 151,000 in January, which was significantly lower than employment growth in Q4 (which was also revised down) and analysts’ expectations. Still the markets got some relief as markets likely expected a much more negative report. Also it is worth remembering that it is not unusual that we see slower employment growth in the following months when it has been higher-than-trend. Trend growth still seems solid, in our view.

Also one has to take into account that the trend growth in the labour force is not that high. As we expect the participation rate to be fairly stable in the coming years, we expect the labour force to grow in the range of 100,000-150,000 per month over the next few years. Thus employment growth of 150,000 is likely sufficient to push down the unemployment rate. This effect was clear from today’s release as the unemployment rate fell to 4.9% in January from 5.0% in December (although the unemployment rate is based on a different survey than the nonfarm payrolls).

Despite the weak activity data and poor market sentiment lately, the labour market still seems solid. Employment growth would have to decline significantly from its current pace to become a concern for Fed.

Average hourly earnings (AHE) surprised on the upside. AHE rose 0.5% m/m in January which was higher than expected. Still, the annual growth rate declined from 2.7% in December to 2.5% in January but this mainly reflect that AHE made a jump in January last year. As AHE is by nature very volatile it is better to look at the trend. The annual growth rate in AHE has been trending up the last year and is currently nearly 1pp higher than in December 14. This reflects that the labour market has tightened significantly. As we expect the US labour market to tighten further this year, we also expect wage inflation will increase. We know from recent Fed communication that it would like to see more ‘hard’ evidence that inflation will increase. Hence, AHE will be an important market mover this year.

Manufacturing employment continues to increase (although at a low level) the very weak manufacturing activity data in recent months. There is likely a lag between lower activity and employment, but so far employment within manufacturing has not suffered significantly. This is also positive for the overall impression of the US economy.

With respect to our current Fed call, today’s release was no smoking gun. We still expect three hikes this year (April, September and December) although we recognise that risks are skewed towards later and fewer hikes. A smoking gun could be when Fed chair Yellen speaks next week. This is the first time we got to hear from her since Fed increased the target range in December and we will listen carefully to hear what she has to say.

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