Established in 1974
185,800 clients worldwide
Over 15,000 markets

Non-farm payrolls look ahead

The latest US jobs report appears on Friday, covering the month of January. Expectations are for 228,000 jobs to have been added, from 252,000 in December, while the unemployment rate stays steady at 5.6%.

People at a jobs fair
Source: Bloomberg

Last year saw the best rate of job creation in America since 1999, and 2015 looks to be another good year. Considering that the unemployment rate in December 2013 was 6.7%, the drop over the year to 5.6% is particularly impressive. Economists have begun to predict a continuance of the fall to 5.2%, with the slowdown in the pace a natural consequence of the economy’s move towards full employment.

This was the picture for 2014:

 

NFP chart

The usual trend was seen again as hiring picked up in the latter part of the year. The increase in pace of growth suggests the US economy is entering a positive cycle, where consumers feel more confident in their jobs and subsequently spend more. The increase in the number of job applications, as measured by the JOLTS number (Job Opening and Labor [sic] Turnover Survey – which measures the number of job vacancies each month) also shows that Americans are more confident about moving between employers.

The earnings picture is still weak however – wages rose 1.7% over 2014, but that was only just ahead of inflation, so workers saw little increase in their pay packets in real terms. Thus markets, and the Federal Reserve, would like to see Average Hourly Earnings, released at the same time on Friday as the NFP number, rise (albeit for different reasons).

The figure for earnings is expected to rebound, rising by 0.3% in January 2015, compared to December’s drop of 0.2%. With gasoline prices falling in the US, consumers have more money to spend, and a rise in wages ahead of inflation (which fell by 0.4% seasonally adjusted in December and is expected to remain weak for January) will compound this increase in spending power.

The Fed is on the lookout for rising wages as the missing piece of the economic recovery puzzle. Its latest statement stressed the importance of this in any rate increase decision. Although a rate hike is likely to be a temporarily bearish development for stock markets, it will boost the dollar once more. As the 1990s showed, US indices and the dollar can both rise in tandem, although investors should prepare for mentions of the damage a rising dollar does to earnings for US firms.

Overall, I expect the general trend of rising employment and wages to continue. Increases in interest rates will be slow and gradual, as Fed board member James Bullard noted this week, which should cushion the shock of rate hikes. The US economy is still streets ahead of its rivals, and this will mean that US indices continue to prosper, even as European Central Bank quantitative easing highlights European markets as a promising destination for investor cash.

IGM_Content_Speaker-Chris-Beauchamp-bio_2col_V2

Follow the action, live

Join Chris Beauchamp in our monthly live webinar as he tracks the markets' reaction to the next non-farm payrolls announcement, scheduled for 12.45pm (London time) Friday 6 February.

Sign up now

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.