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November Payrolls (Dec 4th) – looking beyond 2015
Payrolls overview and policy implications
The latest non-farm payrolls data suggests continued labor market improvement in the month of November. Headline job gains at 211k vs. 200k consensus – pretty much on expectations, and individual components are largely following their recent trends. This will give reassurance to FED officials as they go into the December meeting amid expectations of rate hike.
Moreover, it is time to look beyond 2015 – January 2017 federal funds contract is pricing in 77 bps of rate hike (current effective funds rate at 13 bps, Jan 2017 contract at 90 bps), which translates into slightly more than 3 hikes. If energy prices rise faster than anticipated (boosts headline inflation), or if Chinese economy actually improves instead of holding steady (boosting goods prices via trade channel), a 3rd hike in 2016 would not be a stretch.
Additionally, financial conditions is another wildcard. Raising rates from the zero lower bound is akin to letting foot off the gas when the car has been going at 90 for as long as many people could remember. If rate hike results in rapid rise of long-term borrowing costs and weigh on economic growth (imagine the car just drops from 90 to 50 the second gas pedal is released), the FED’s rate path will have to be even more gradual. Conversely, if the initial rate hike failed to push up long-term borrowing costs, widen credit spreads, or push down stock prices (financial conditions does not tighten as expected), the driver (FED) will have to push down firmer on the brakes (hike rates faster). Given FED’s repeated assurances of gradual rate hikes, some market participants may mistaken the communication as a pledge and push down bond yields (thus triggering a response from the FED).
Nevertheless, a lot will depend on how policy normalization unfolds – especially technical considerations specific to ON RRP discussed here:
November Payrolls – individual components
First, a look at the types of jobs gained / lost:
Specialty trade contractors (including carpenters, construction laborers, construction managers, cost estimators) led the number of job gains, followed by the usual gains in “food services and drinking places” and professional workers (this also includes a lower-paying temporary-help category, covering temp workers from staffing agencies)
Interestingly, department stores led the job loss (sales moving online), and motion picture sound recording industries followed closely behind (production cut?)
Next, the revisions – the October job gains were revised higher to an even more impressive 298k from 271k (two-month revision up 35k). Nonetheless, the November Payrolls report is still quite respectable in its own right: labor force participation rate up a touch to 62.5% vs. 62.4% prior, a factor that led to a slight rise in the U-6 unemployment rate to 9.9% vs. 9.8% prior. U-3 unemployment rate unchanged at 5%. Percentage of involuntary part-time workers rose to 3.87% vs. 3.67% prior, however.
Labor force participation rate rose a touch under both the prime age (25-54) and aggregate indices.
Average hourly earnings came in on-consensus
Percentage of long-term unemployed workers declined to 25.7% vs. 26.8% prior
Next article12 04 2015 | by Victor Xing | Economics