November jobs report not a key determinant for Fed’s decision to hike in December

Jobs report preview – November not a key determinant

Labour market data have been solid in November, with low initial claims and the Markit PMI employment index pointing to slightly higher job growth. However, estimation models based on claims have tended to overestimate job growth recently, while the PMI employment index has underestimated job growth. The ADP jobs report was good overall with strong jobs growth of 210,000 in November, but downward revision of 28,000 in October. We estimate non-farm payrolls increased by 170,000 in November in line with the recent trend and more or less in line with the consensus of 180,000. We estimate private services was the main contributor to job growth, with 150,000 new jobs added here. After three months in decline, we see manufacturing employment unchanged in November since manufacturing activity points upwards. Construction employment probably increased 10,000 in November with risks skewed to the upside due to a solid increase in housing starts in October. We estimate an unchanged unemployment rate at 4.9% and that average hourly earnings increased 0.2% m/m implying an unchanged wage growth rate of 2.8% y/y.

The October report was strong, with job growth of 161,000, upwards revisions of previous months, declines in both the unemployment and underemployment rates to 4.9% and 9.5% respectively (from 5.0% and 9.7%) and acceleration of wage growth to 2.8% y/y (from 2.7% y/y). This is in our view sufficient ‘further evidence’ for the FOMC to raise rates in December, which is now also fully priced in by markets. We do not see the November jobs report changing the view that Fed is going to raise rates in December.

On average, job growth has been around 50,000 lower per month in 2016 compared to 2015. With the economy gaining momentum now, we could see employment growth move a bit higher in the coming months. However, a tighter labour market now should cap jobs growth. The magnitude of employment growth over the coming year depends on the amount of slack left in the labour market. Flat unemployment measures and wage inflation have suggested slack still persists.

More dovish FOMC next year likely to run the labour market hot

Looking into 2017, the FOMC is turning more dovish ‘on paper’, which emphasises the importance of strong labour market performance and continued progress on unemployment and wage growth. A hot labour market is viewed by several dovish FOMC members as a chance to undo some of the supply-side damage done by the great recession. This should ultimately increase the participation rate, making room for further employment growth. However, the risk is that the economy overheats, which will ultimately force the FOMC to hit the brakes. Of the twin-goals, we see inflation as the one being furthest from target. An increasing wage inflation rate will be a solid indication of increasing inflationary pressure in the economy. Hence, letting the labour market run a bit hot could help to bring core inflation back above 2 percent. Altogether, we believe the FOMC will look through accelerating wage inflation in the short term and let the labour market run a bit hot to make sure slack is fading and core inflation is moving towards (above) the two percent target.

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