US Watch
Group Economics Macro & Financial Markets Research Maritza Cabezas, +31 20 343 5618
Job report: step closer to September hike 7 August 2015 •
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The US labour market remained strong in July. Employment rose by 215K down from 231K the previous month. The unemployment rate was unchanged at 5.3%. Average hourly earnings, increased 0.2% mom and 2.1% yoy. This report is pointing to diminishing slack in the labour market. We think the solid underlying fundamentals of the US economy support a September rate hike. Investors have moved to price in a rate hike this year, but later than September, which suggests that there is further room for short-term yields and the US dollar to rise.
Job growth remains strong
Strong fundamentals of US economy call for rate hike
July’s employment report continued to show a strong labour
Job gains above 200K are a sign of a strong labour market,
market. Nonfarm employment increased by 215K in July, down
while in the long run a falling unemployment rate is a prime
from a revised 231K the previous month. The unemployment
rationale for normalizing interest rates. We think the solid
rate was unchanged at 5.3%. Meanwhile, measures of
underlying fundamentals of the US economy are strong and
underutilisation of labour were practically unchanged. Persons
should keep the Fed on track for a September liftoff. US
employed part-time for economic reasons edged down to
economic growth is lower than in previous cycles, but it is now
10.4% from 10.5% the previous month, while the participation
growing at above-trend rates. As a result slack is diminishing
rate was unchanged at 62.6%. We think that a stronger
and this is likely one of the major reasons for the Fed to hike.
economy should gradually improve the situation of these
Inflation may look distant from the Fed’s 2% goal, but this is a
workers. Indeed, forward looking measures of employment,
medium-term objective. We expect that inflation will remain
including job openings, have increased significantly this year
below 1% this year, but will move towards the 2% target next
and this should remain the trend in the coming time.
year.
Job growth mainly boosted by services
Rate hikes not fully priced in
Job growth was concentrated in the service sector (+193K),
Following the jobs report, markets priced in a higher probability
but non service jobs showed some improvement.
of Fed rate hikes this year, leading to higher short-term
Manufacturing, which has hard hit by the lower oil prices,
Treasury yields and a stronger dollar. This move has further to
impacting energy-related industries, and strong dollar showed
go. A hike in the Fed's target range is fully priced in for
some signs of revival (+15K) Construction continued to show
December, but not for September according to futures
modest job gains (+6K).
markets. In addition, we think the Fed will raise its target range in both September and December.
Wage growth picks up Average hourly earnings, increased 0.2% up from 0%. On a
US economy adds 215K jobs
year-on-year basis, wage growth was 2.1%, up from 2.0% the
000’s
previous month. Other measures of wages have been broadly pointing to a modest pace of wage growth. We think that slower productivity growth could be keeping wages supressed, since higher wages in a context of lower productivity reduce profit margins. This however, should not be an impediment for a rate hike. Chair Yellen has repeatedly expressed that higher wage growth is not a necessary condition for a rate hike.
%
600 400 200 0 -200 -400 -600 -800 -1000
12 10 8 6 4 2 0 06
07
09
10
Non farm payrolls (lhs) Source: Thomson Reuters Datastream
12
13
15
Unemployment (rhs)