Monday, September 7, 2015

Some further improvement in the US labour market

US August employment data was consistent with “some further improvement” in the labour market.  By itself that seems to meet the criteria for “lift-off” for US interest rates in September, but it’s not that simple.

The only disappointment in the report was the increase of 173k in non-farm payrolls which was below expectations of a +200k result.  But that disappointment is ameliorated by the observation that the initial estimate of August payrolls often undershoots the recent trend, only to benefit from upward revisions in subsequent months. 

Everything else in the report pointed in the right direction.  June and July employment growth was revised up by a combined 44k, jobs growth is increasingly broad-based, hours worked remains consistent with above trend growth and the average work week rose. 

Average hourly earnings rose 0.3% in the month although the annual rate of increase remains stuck at 2.2%.  Most importantly the unemployment rate fell to 5.1% - and is now bang on the mid-point of latest Fed estimate of longer run unemployment (NAIRU).  On its own this data fits the bill for some further improvement in the labour market and supports the case for “lift-off” in September.

That just leaves the Committee’s interpretation of recent market volatility.  As I said last week, market volatility by itself should not delay the Fed.  Indeed some volatility should be expected whenever the Fed starts any rate hiking cycle, let alone the first hike in nearly a decade. 

But it’s a different matter if the Committee views that volatility as indicative of factors that may impact the growth and inflation outlook in the US.  To the extent that recent volatility has been due to concerns about growth in China, this week’s release of the usual monthly plethora of Chinese activity data will add further fuel to the debate.  More on that later in the week.