US: Labour market one of the few bright spots left in Fed's chart book

Jobs report preview

The labour market tightened significantly in 2015, which was the main reason why the Fed raised the target rate in December, as PCE core inflation is still subdued. Since then there has been much uncertainty about the true state of the US economy, as the financial turmoil in the beginning of 2016 partly reflects growth concerns due to monetary tightening and weak data releases. The big question is when Fed will increase the target range next time. At the FOMC meeting on 27 January the statement was relatively dovish, which supports our view that Fed will skip March as well, 27 January. Markets are pricing less than one hike this year. The jobs report will be very important as the strong development in the labour market is one of the few bright spots left in the Fed’s ‘chart book’. A weak jobs report could be a game changer for the Fed and could also weigh significantly on market sentiment. A strong jobs report would calm the markets and the Fed as further job growth would indicate a solid underlying growth trend in the US economy. Wage growth picked up in 2015 but is still subdued. Even if we get a strong jobs report the Fed would like to see some more wage inflation before it will increase the target range next time, as it is no longer ‘reasonably confident’ that inflation will reach 2%.

We estimate non-farm payrolls increased 200,000 in January, which is in line with the recent trend growth (consensus is 190,000). The growth in employment is mainly driven by private services, as we expect manufacturing employment to be unchanged. As job growth in December was well above trend, we see a risk that employment growth in January might be lower due to overshooting in December. This could be interpreted by the markets as a sign of weakness, although it may be due to pure volatility. We estimate the unemployment rate was unchanged at 5.0%.

We estimate that average hourly earnings (AHE) grew 0.3% m/m in January implying a growth of 2.2 % y/y, which is in line with consensus. Thus we expect the wage growth to have declined in January but this mainly reflects a large increase in wages in January 2015. That said, wages have not grown this fast since 2009. As we expect the labour market to continue to tighten in 2016, we also expect wage growth to increase further.

General condition of the US labour market

In general we expect the US labour force to grow in the range 100,000-150,000 per month. Thus the labour market tightened significantly in 2015 with average job growth of around 200,000 per month. We expect the labour market to tighten further, which should bring unemployment below NAIRU. This should put upward pressure on wages and thus PCE core inflation in the medium term. This is why the Fed still signals that it wants to tighten further as it to a large extent sees the world through the eyes of the Phillips curve.

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