A look ahead to non-farm payrolls

Once the European Central Bank meeting is out of the way, the non-farm payrolls report will move into focus once again, though this month the actual number of jobs created will almost be secondary to the average hourly earnings data released at the same time.

NYSE on Wall Street
Source: Bloomberg

The July jobs number was below expectations, coming in at 209,000 for the month when 231,000 had been forecast. Average hourly earnings growth failed to grow on a month-on-month basis during July, and rose by only 2% year-on-year.

This month, expectations are for an increase of 230,000 in jobs, with the unemployment rate dropping slightly to 6.1% from 6.2%. Average hourly earnings are expected to rise by 0.2% month-on-month and 2.1% year-on-year.

A report from the Chicago Federal Reserve Bank recently noted that wage growth was being held back by slackness in the labour market, i.e. a large number of part-time workers are unable to find full-time work, even if they are trying to find such jobs. As a result, average real wages in the US, the bank said, would be 0.5% to 1% higher in June 2014 if market conditions were as strong as in the pre-2008 period.

Janet Yellen has made much of this data, which she believes indicates that the US labour market is not as strong as the headline numbers indicate. At the current rate, wage growth barely keeps purchasing power ahead of inflation, meaning that although the US economy is recovering, the trickle-down effect has yet to be really seen in wage packets.

It is this, not the consistent increase in job numbers (which, if it comes in above 200,000 this month, would be the seventh straight month of gains above this level), that is staying the Federal Open Markets Committee’s hand from opting for a more hawkish monetary policy.

Tomorrow’s reading will see markets focus on the headline number, and the revisions to figures from previous months, but it is the hourly earnings figures that will be of real importance in the weeks to come, particularly with the next Federal Reserve meeting coming up.

In recent weeks, good economic data from the US has done much to underpin the equity market rallies, but has also boosted the dollar. If we see another strong reading then markets look ripe for further gains, although much of the overall reaction in the coming weeks will depend on the reaction to the ECB meeting. 


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