October job growth to keep December hike in play

Job report preview

• Our models suggest job growth in October of 170,000 – below the mid-year pace but still enough to put additional downward pressure on the unemployment rate.

• We estimate that the manufacturing sector shed 11,000 jobs in September, as the sector remains under pressure from a strong US dollar and the employment index in the ISM manufacturing survey dipped to a six-year low in October. We look for government employment to increase by 10,000 and construction employment to pick up pace again and add 30,000 jobs.

• In terms of the unemployment rate, we estimate the rate stayed unchanged at 5.1% in October but forecast it will head below 5% by year-end.

• The Q3 15 employment cost index showed a rebound in wage growth, which put the pace of wage gains in line with that of last year. So far, wage growth is not showing any clear signs of acceleration despite the substantial decline in labour market slack. The same is true for the employment reports’ measure of wages, the average hourly earnings index. A pick-up in wage inflation is important as it would help to reassure the doves of the FOMC that the labour market is indeed running tight.

General condition of the US labour market

• The August and September employment reports showed a slowdown in job growth, with the three-month average pace of job growth at 167,000 in September down from 201,000 in August. As we highlighted in the labour market monitor for September, we do not think that a slowdown of this magnitude is an obstacle for a coming Fed hike. Currently, potential labour force growth, under a positive assumption about a rebound in the labour participation rate, is around 150,000 per month and even lower if the participation rate fails to increase.

• This means that with job growth at an average of 170,000 per month in the coming six months, the unemployment rate will reach the low end of the Fed’s projected NAIRU range (4.9%) early next year and continue lower thereafter. This is on the assumption that the labour force participation rate will show a temporary rebound next year. If an increase in the labour force participation rate fails to materialise, the unemployment rate would significantly undershoot the Fed’s NAIRU range by the spring.

• The October FOMC statement was a reminder that a December Fed funds rate hike should not be dismissed. We continue to expect the first rate hike in January next year, primarily because of the weakness in the US manufacturing sector, which we think will keep the Fed in wait-and-see mode at the December FOMC meeting. We believe that the fast reduction in labour market slack next year will prompt the Fed to tighten monetary policy faster than currently priced in by markets.

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