US Labour Market Monitor: Job growth is strengthening

Job report preview

• We look for a positive surprise in Friday’s job report with a solid increase in nonfarm payrolls of 260,000 (consensus 225,000). We also expect a drop in the unemployment rate of 0.1 percentage point to 6.1% (same as consensus).

• Continuously low jobless claims figures, a very high ISM manufacturing employment index as well as optimistic hiring plans are the main reasons for the estimate. Moreover, service payrolls for July came out low at 140,000 and we expect a decent rebound pulling the total nonfarm forecast up.

• Wage growth will also be in focus in Friday’s report. Most data point to reduced slack and the time to fill vacancies has accelerated recently to the highest level since the series began in 2000. So far actual wage growth has remained subdued but it seems wage pressures are gradually building.

General condition of the US labour market

• The US labour market has tightened substantially with the unemployment rate at 6.2 % closing in on the Fed’s long run estimate of a natural unemployment rate (NAIRU) of around 5.4 %. A constant participation rate in Q2 suggests the decline in unemployment through this period is reflecting real improvement in the labour market.

• Increases in non-farm payrolls are averaging 244,000 m/m over the six months and above 200,000 m/m within the last year.

• Despite the positive tendencies of several key figures, a range of other labour market indicators suggests that there remains significant underutilisation of the labour resources as stated in the latest Fed statement. The U-6 unemployment rate is still at a high level, though it has been decreasing rapidly in recent months. Likewise, many people are only working part time due to economic reasons. As the unemployment rate has moved closer to the Fed’s estimated natural level of 5.4%, the attention turns 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.