Monday, February 8, 2016

Payrolls soft, rising labour costs

After another batch of generally soft US data during last week all eyes were on Friday’s payrolls data, particularly for hints about the next move in US interest rates.  As it turned out the signals were mixed.

Employment growth was +151k in the month, lower than expected and a noticeable slowdown from the stellar pace of jobs growth in the fourth quarter of last year that saw payrolls expand at an average +279k per month.  The question is how much of this is genuine slowdown and how much is seasonal.

The detail had some quirks and didn’t help clarify the story much.  While I don't buy the US recession story, the economy is a story of two parts.   Manufacturing is the sector closest to recession for all the reasons we’ve discussed before, yet manufacturing jobs rose +29k in the month.  Jobs growth in the service sector was +118k, still strong but weaker than late last year and consistent with the drop in the services PMI employment sub-index seen earlier in the week.

The unemployment rate ticked lower to 4.9% despite a move higher in the participation rate.  We’ve been expecting to see some cyclical pick up in the participation rate which would likely moderate further declines in the unemployment rate, but such was the strength of employment growth in the household survey that unemployment ticked lower regardless.

Some bounce had been expected in wages following a flat December month. Average hourly earnings were up 0.5% in the January month and 2.5% in the year.  This combined with last week’s poor productivity growth (+0.3% for calendar 2015) will have the FOMC’s cost-push models suggesting higher interest rate are warranted.

 But some of the activity indicators have been undeniably soft.  I still think a good part of the weakness we have seen recently will prove transitory.  I liked the blip higher in the “new orders” component of manufacturing PMI and I think the weakness in the non-manufacturing survey is largely related to poor core retail sales growth at the end of last year that was in part due to the good weather and poor clothing sales.

How the Committee balances concerns about growth with concerns about inflation is key to the outlook for interest rates.   Right now the pace of growth in jobs and unit labour costs are consistent with a more gradual pace of rate hikes than the four indicated by the FOMC (which we always though would be too aggressive), but more than the none indicated by the market.