Monday, June 9, 2014

Broad-based gains in US jobs - keep watching wages

The 217k broad-based increase in US jobs growth in May supports the story of solid GDP growth in the period ahead.  The three-month average jobs gain is running at +234k while the unemployment rate remained stable at 6.3%, suggesting the sharp fall in April wasn’t an aberration.

The combination of strong growth in hours worked (three-month annualised growth of +4.2%) and wage growth (private sector average hourly earnings +2.4% in the year to May) indicates strong income growth which in turn supports our contention of strong growth in personal consumption of around an annualised 3% over the next few quarters.  Recall personal consumption growth was the star in the generally disappointing March quarter GDP data, supported in part by higher spending on utilities as a result of the poor weather.   Underlying growth was probably closer to 2.5%, but based on this data we expect momentum to pick up as the year progresses.

We continue to believe that wage growth, productivity and ultimately unit labour costs hold the key to the timing of interest rate increases in the US.  Wage growth is still low but is clearly trending higher.   Productivity and unit labour costs have been volatile lately; in the March quarter productivity slumped and unit labour costs surged as poor weather saw a decline in output while firms held onto labour reflecting the likely short-term nature of the disruption.  That will likely reverse in the June quarter.
We expect the labour market will continue to tighten and wage growth to continue to trend higher.  That will ultimately lead to higher unit labour costs and higher inflation – it’s just a question of when.  At this point we remain of the view that the Fed will be able to get to mid next year before contemplating raising interest rates.