US: Slower jobs growth but not a disaster

Jobs report preview

We estimate non-farm payrolls increased 160,000 in February, below the current consensus of 195,000. Job growth is driven mainly by private service payrolls, which we estimate increased 151,000 in February, up from the 118,000 increase in January. We see mixed signals from the service sector, as strong retail sales from January indicate that the domestic part of the US economy is still in good shape and consumer confidence remains at a healthy level despite the decline in recent months. In contrast, the Markit Service PMI came out very weak last week, raising fears that service sector growth is cooling along with the weakness in the manufacturing sector. In terms of the unemployment rate, we expect it to remain unchanged at 4.9%.

We estimate manufacturing payrolls declined 15,000 in February. Over the past few months, we have seen ISM manufacturing falling to levels around 48, without a correction in manufacturing employment, which has increased 45,000 in total over the past three months. Hence, we expect to see a payback in jobs growth in February. We estimate construction jobs growth slowed to 15,000 in February. Weather conditions in November and December were better than usual and we find it likely that some construction work has been pushed forward to 2015, leaving a lower than usual workload at the beginning of 2016.

Average hourly earnings have moved higher lately, which has bolstered the Fed’s confidence in the inflation outlook. However, the latest decline in both market and survey-based inflation expectations has spooked some at the Fed. We believe that the continued progress in the labour market will keep wage inflation trending higher but if February data shows stagnating or even slowing wage growth, it will further reduce the chance that the Fed will proceed with the hiking cycle anytime soon.

General conditions of the labour market

The labour market has tightened significantly over the past year and the uptick in (real) wage inflation has been welcomed by the Federal Reserve. As labour productivity remains low, we have seen a significant increase in unit labour costs, putting upward pressure on inflation. Actual core inflation has surprised on the upside lately, with the core PCE (the Fed’s preferred measure of inflation) now at 1.7% y/y. On the other hand, the uptick in the labour force participation rate since September and the corresponding increase in the labour force is taking some of the pressure to tighten monetary policy off the Fed. If labour force growth continues at the current pace over the coming months, it should ease the upward pressure on wages. We stick to our view that the Fed will take a ‘wait-and-see’ approach and stay on hold until the September FOMC meeting.

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