US jobs growth to bound back?

As we head towards the monthly non-farm payrolls release we can look back at the August number and try to determine whether it was a blip, or something more permanent.

US flag

There were 142,000 jobs added in August, a significant drop from the number created in preceding months. The reaction was a broadly negative one, with equity indices unsettled by the idea that US growth was not as strong as previously thought, while also being worried that the number was not bad enough to prompt any reassessment of monetary policy by the Federal Reserve.

However, there are reasons for optimism. August is often a weak month, with employers declining to hire during a month that is traditionally slower for businesses. Meanwhile, average monthly non-farm payrolls are still above the 200,000 mark, which points to economic growth in the US that is still reasonably solid.

Job revisions in August are normally of the positive variety, as has been the case since 2009:

Revisions to non-farm payrolls 2009-2013

Data going back eighteen years shows that fourteen of the August jobs reports have not met expectations at the first try, but twelve of those have seen upward revisions. So the augurs are good for another upward revision to the latest number this year, which would at least allay concerns about the US economy.

Away from job numbers, other indicators are pointing to growth as well. ISM data shows that new orders have hit their highest level in ten years, while car sales have accelerated to levels not seen since 2006. The market implications of this rosy scenario are that short-term US Treasury yields are likely to rise quicker than the long-term variety, which have been held back by safe-haven buying. At 0.6% they have hit their highest level since 2011, a trend that is likely to continue as markets price in a US interest rate hike.

In addition, the rally in the US dollar does not show signs of stopping. Following the latest non-farm payrolls figures, the dollar hit a fourteen-month high versus the euro, and that trend has only continued, while the dollar index is pushing out to levels not seen since 2010.

US dollar index 2009-2014

As data improves investors will continue to buy the US dollar, with the move boosted by the easing stances of the European Central Bank and the Bank of Japan. With China slowing as well, the outlook points towards further gains for the US dollar as the time for a Fed rate hike (whenever that may be) draws nearer.

Finally commodities are set for another bout of poor performance. Although gold is down by around 1% from the beginning of the year, the long-term trend is firmly down, with the metal off by 12.4% since its 2014 peak. Silver, copper and iron ore are in a similar situation, with oil falling thanks to a combination of a rising US dollar and increasing supply.

As we look to Friday, the broad picture is that September’s jobs report will show a bounce back from the August slump, while August’s figure itself should see an upward revision. The US economic recovery continues. 

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