Update US Labour Market Dashboard

Strong October payrolls growth, while labour market slack continues to diminish

At the September FOMC meeting, the Fed didn’t start its tightening cycle, despite earlier hints. Many were surprised by the decision as labour market conditions improved and the unemployment rate dropped to 5.1%, within the Fed’s current definition of full employment. However, the Fed wanted more time to assess the impact of the Chinese/EM slowdown on the US economy. In order to bring clarity, Yellen gave a speech some days after the meeting. She explained that labour market conditions remain at the core of the Fed’s reaction function. Inflation is important too, but if labour market conditions tighten a bit further, inflation will start accelerating and the FOMC would be reasonably confident that inflation would move towards the 2% target in the medium term (Phillips curve). Two Fed board governors expressed doubts about the reaction function that Yellen put forward. They doubt that inflation will accelerate once the NAIRU is reached. In October, the FOMC dropped the reference to global developments and put more emphasizes on domestic ones, especially the labour market data. The strong October payrolls report and the September JOLTS report suggest that indeed “some” further improvement in the labour market has occurred.

Here we focus on the labour market developments, as these are crucial in the Fed’s decision on when to start its tightening cycle and how to proceed later on. We provide you with an update of our Labour Market Dashboard.

Payrolls growth slowed sharply in August and September to respectively 153K and 137K, suggesting a cooling of labour market conditions. Other data are more mixed. The October payrolls and the September JOLTS report suggest that the labour market has improved further. The unemployment rate (U3) dropped faster than the Fed expected in past years reaching the full employment mark (5%). The faster decline of the more broadly defined unemployment rate (U6) is also positive. The index dropped to the 9.8% mark, down 1%‐point since May 2015 and only 1%‐point away from target. The share of long term unemployed fell 5.1%‐points in the past year, but is still high at 26.8% and has stopped its declining trend. So, there is still some slack, but it diminishes and gives less qualified workers better chances to get a job.

The JOLTS labour report is published with a one‐month lag. It gives us a richer insight in the dynamics of the labour market. Job openings rose again in September, following an unexpected fall in August. The trend is still up and the level is very high. Other measures like jobs quits and lay‐offs rate all stabilized in August at reasonably good levels, but the second monthly decline in the job hires is a negative .

The participation rate stabilized in October at a low 62.4, but the downtrend remains in place. While part of the sharp decline in recent years is due to structural and demographic factors and thus outside the remit of the Fed, another part might be cyclical in nature. This falling participation rate, together with the still higher U6 unemployment rate and the high share of long term unemployed, might convince the FOMC to increase its rates only very gradually after the lift‐off.

Finally, wage growth remained fairly flat since the end of the crisis in 2009 and is well under the desired rates. If employment growth slows and inflation would rise again, maybe due to basis effects, real disposable income growth may fall short of what is needed to have strong consumption growth, the main pillar of GDP growth. However, in October wage growth accelerated to 2.5% Y/Y, a welcome development that needs confirmation though. It might suggest that the causality between low unemployment, wage growth and inflation is still working, but maybe at lower unemployment rates than before (shifting Phillips curve).

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