The US labour market continued to boom in November, with job creation pushing to its highest level since early 2000. The Federal Reserve remains on track to raise rates by mid next year and, at this point, the US presents an upside risk for global growth estimates.
Non-farm payrolls rose by 321,000 in November, easily beating expectations, to be on track for its strongest calendar year since 1999. Payrolls were revised up in both October (up 243,000 compared with an earlier estimate of 214,000) and September (up 271,000 compared with 256,000).
The recent surge in employment can best be understood with reference to the trend. On a trend basis, non-farm payrolls are rising at their fastest monthly pace since February 2000. Over the past twelve months, the US economy has experienced a net increase of 2.73 million jobs. Non-farm payrolls are now 1.68 million above their pre-crisis peak.
Private non-farm payrolls rose by 314,000 in November, while government payrolls climbed by 7,000. Federal and state governments drove public sector employment growth in November, while the local government cut jobs slightly.
Government payrolls -- at all levels -- remain well below their peaks. In fact, federal government employment is at around its lowest level since 1966.
Payrolls at state and local governments have begun to climb, with local government payrolls 80,000 higher in 2014 so far; state government payrolls have climbed by 16,000. Federal government payrolls have provided a modest drag throughout 2014 but with the federal government deficit expected to remains reasonably well contained over the next few years, I expect some modest expansion before President Obama leaves office.
The services sector continues to be the engine behind the recovery, gaining a further 273,000 jobs in November. Over the past year, the services industry has accounted for almost 87 per cent of total job growth.
Despite the strong pick-up in non-farm payrolls, the unemployment rate remained at 5.8 per cent in October but has fallen by 1.2 percentage points over the year. The participation rate was also unchanged, remaining near 35 year lows, but has stabilised over the past year.
Nevertheless, it is widely anticipated that the participation rate will decline somewhat further over the next decade. That’s the reality of unfavourable demographics but this effect will be offset in the short-term by a cyclical boost to participation as employment growth boosts the prospects of the long-term unemployed and those who gave up on finding a job in the years after the crisis.
The payrolls and unemployment data provide two distinct pictures of the US labour market. It’s important to remember that these two figures are based on two separate surveys -- the Current Employment Statistics (also known as the establishment or payrolls survey) and the Current Population Survey (also known as the household survey).
In the long-term they tend to move together, providing a unified view of labour market conditions but there can be short-term disagreement. For a few months now the household survey has been somewhat stronger than the payrolls survey so this month’s result may simply reflect the payrolls survey playing catch-up.
During times of conflict, I generally prefer to stick with the payrolls survey due to its vastly larger sample size. The reality though is that over the past six to twelve months the two measures are saying the same thing: the labour market is improving.
If monetary policy was solely based around employment growth and the unemployment rate, then the Federal Reserve would be well on its way to policy normalisation, but there’s a third part to this story that will go some way to determining the timing of the Fed’s next move.
Average hourly wages rose by 0.4 per cent in November, the strongest outcome since June last year, to be 2.1 per cent higher over the year. The average work week also rose, increasing the effect of hourly wages on weekly income.
Real hourly earning has picked up in recent months, which is good news for household spending, but remains weak by historical standards. The fact that nominal wages haven’t increased a great deal indicates that inflationary pressure has actually eased somewhat in recent months.
Until wages begin to pick-up, inflation is unlikely to push above the Fed’s annual target of 2 per cent inflation. That’s particularly true right now because a much stronger US dollar will soon begin to weigh on monthly inflation.
I expect wage pressures to mount as we enter the new year. There remains some spare capacity across the labour market but, bit by bit, businesses will begin to find it more difficult to find employees and market power will shift towards the workers, prompting an upward shift in wages and eventually inflation.
As it stands, the strength in the US labour market points to a rate hike by mid next year. Obviously, a lot can change between now and then and I see some scope for an earlier move if the unemployment rate drops to, say, 5.5 per cent by March. Either way, it will take a considerable shift in momentum for the Fed to not begin normalising rates next year.