A look ahead to February’s non-farm payrolls

It was a storming US non-farm payroll number last month, as the world’s largest economy started the year on a strong note. Can that momentum be maintained, and are there other elements that we should be watching? 

People at a jobs fair
Source: Bloomberg

Job growth in the US was far ahead of expectations in the last payroll report, coming in at 257,000 for the month of January. This month 235,000 jobs are expected to have been created, while the unemployment rate dips slightly to 5.6%.

Despite this, it is becoming to be the received wisdom that the powerhouse of the world will hit ‘full employment’ by the end of 2015 (i.e. lowest rate of joblessness that does not create excessive inflation). Regional Federal Reserve president John Williams recently observed that the unemployment rate will reach 5%, thanks to increasing consumer spending.

Revisions to December’s number meant that the US actually created the largest number of jobs in 2014 for fifteen years, which has shifted expectations regarding the outlook for interest rates in the US. It is possible we will see a rate increase from the Fed during the summer, possibly as early as June. However, the possibly bearish implications this has for stocks is likely to be offset by the European Central Bank’s quantitative easing operations, which will be in full swing by the summer of this year.

It is important to note that job growth in the US is not an even picture. Government jobs continue to see a small decline, while the best areas for growth have been in construction and social assistance. In addition, ‘quit rates’, i.e. the number of people resigning, have yet to hit pre-crisis levels in most industries. In fact only mining and logging, beneficiaries of the strong performance of the oil sector, have seen higher quit rates, and with oil’s precipitate fall this is likely to be reflected in the numbers this Friday.

An increase in minimum wages across many US states in January helped push up wages in the private sector during the month as well, boosting the average wage figures that are released at the same time. Research from the US Conference Board suggests that younger employees are seeing faster wage rises than their older counterparts. Previous performance suggests this positive trend will spread to other age brackets in time, which will arguably complete the picture for a Fed looking to raise rates.

Finally, keep an eye on the participation rate – the number of workers that have given up looking for jobs. This continues to fall along with the overall rate, which signals greater weakness than a declining headline number would indicate. Fewer Americans seeking work means a smaller pool of unemployment, making figures look better than they actually are. If the participation rate starts to rise, we can be sure that the US economy really is getting back to full health.

There are a number of factors to monitor when non-farm payrolls are released, and it will take time for the market to digest them. It is likely however, that barring any sudden slump in job numbers, this Friday’s number will be taken as yet another step on the road to a Fed rate hike. 


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