US Payrolls: Unemployment to challenge Fed - BNPP

US Economics Team at BNP Paribas, suggests that the US November jobs report revealed a steady pace of employment growth, a sharp drop in the unemployment rate and a slowing in average hourly earnings.

Key Quotes

“Net-net, we see the improvement in the employment indicators (payrolls and the unemployment rate) as likely to outweigh noisy earnings growth – the trend remains firm.”

“In November, 178,000 jobs were added, in line with consensus expectations of 180k. The unemployment rate fell 0.3pp to 4.6%, and earnings came in weaker than forecast at -0.1% m/m and 2.5% y/y.”

“Hiring was stronger than expected in the leisure and hospitality, and construction sectors, which added 29k and 19k jobs, respectively. The largest downside surprise, relative to our forecast, was in the information and other services sectors.”

“The household survey showed a 160,000 gain in employment in November, with a 0.14pp decrease in the participation rate to 62.7% (last: 62.8%), which took the unemployment rate down to 4.6% (4.64% unrounded).”

“Average hourly earnings disappointed in November, declining 0.1% m/m as giveback to a chunky 0.4% m/m rise in October. In annual terms, earnings growth fell to 2.5% from 2.8% in October, partly due to base effects. We also highlighted the risk of average hourly earnings disappointing in November, due to an unwinding of the prior month’s distortions from Hurricane Matthew.” 

“The current unemplyment rate of 4.6% stands 0.2pp below the lower bound of the FOMC’s latest central tendency for the long-term unemployment rate (or the non-accelerating inflation rate of unemployment) of 4.85.0%. While we have seen some volatility in the unemployment rate, its current level raises doubt about whether the economy is well above full employment and if the Fed is behind the curve – particularly if we end up with a substantial fiscal stimulus next year that gives the economy and employment a further boost.”

“The market has already fully priced in a December hike. Latest employment report provided more evidence of continued progress in the labour market. We continue to expect a 25bp hike in December, followed by two hikes in the second half of 2017, once President-elect Trump’s stimulus plan is legislated.”