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U.S. January Employment Report: Comments from Christophe Barraud

Christophe Barraud, Chief Economist & Strategist at Market Securities, sent me his analysis concerning the U.S. January employment report:


1/ Despite negative temporary factors (adverse weather conditions, labor disputes at major West ports…), NFP rose 257K in January, well ahead of a consensus of ~230K. There was also a big net upward revision to November-December of 147K that left the three-month average growth at 336K (highest since Nov. 97).  With the latest revisions, the U.S. added 3.12 million jobs in 2014 (an upward revision to the prior estimate of 2.95 million), the best since 1999′s gain of 3.18 million jobs.


2/ Separately, the main event is the sharp rebound of average hourly earnings MoM (strongest increase since Nov. 2008) which pushes the YoY figure (+2.2%) to its highest level since Nov. 2013.


3/ Concerning the “Household Survey”, including the new population in the Current Population Survey (CPS) estimation process, the unemployment rate was estimated at 5.7% (not directly comparable with data for December 2014 or earlier periods) which remains close to the threshold defined by the CBO as the NAIRU (full employment), namely 5.6%.

4/ All in all, it was another very strong report which  downplayed doubts about the current wages’ growth. As a consequence, more than ever, I believe that the Fed remains on track to raise rates in H1 2015, more precisely in June .

U.S. December Employment Report: Comments from Christophe Barraud

Christophe Barraud, Chief Economist & Strategist at Market Securities, sent me his analysis concerning the U.S. December employment report:


1/ NFP surprised on the upside at 252K (11th consecutive months over 200K) vs 240Ke and once again, figures were revised upward in Nov. (+32K) and Oct. (+18K) so that, in 2014, NFP monthly average reached 246K (highest since 1999), up from 194K in 2013. Note that for private employment, 2014 was the best year since 1997. The improvement was broad based with all components adding jobs. Construction sector created most of jobs (+48K) in a context where weather conditions were clearly better after a cold and snowy Nov. which means that housing data should improve in Dec.


2/ Separately, the unemployment rate fell 0.2% to 5.6% which is the lowest since June 2008 but also the threshold defined by the CBO as the NAIRU (full employment). This drop can be explained by the significant decrease of the unemployed people (-383K to 8.688M, the lowest since June 2008) and the ongoing decline of the participation rate to the lowest level since 1978 (-0.2% to 62.7%). Once again, figures suggest that, in line with recent findings in academia, this move is mainly due to demographics and not to discouraged workers. The fact is that many of the people exiting the labor force were actually employed in November which means that older workers decided it was time to retire. Here is the breakdown, last month, some 4.4 million Americans went from having a job to being out of the labor force, the highest number since August 2007. That’s twice the 2.2 million who went from being jobless to out of the workforce.


3/ Therefore, more entry-level positions (not getting too much paid) and retirements of more expensive employees probably played a role in the decline of wages (-0.2% MoM, the biggest drop since records began in 2006). Separately, we have to keep in mind that stores and online merchants hired a larger-than-usual army of seasonal workers with low salary. Note that in Dec, retail workers saw average earnings fall 0.4% to $17.04 an hour from $17.11 in November. Finally, several economists were particularly cautious about the data. As a matter of fact, Citi and JPM said they believe the distribution of average earnings declines across sectors suggests a broad adjustment error which may well be corrected next month causing a big snap back higher in the data. This scenario seems likely given that several states raised the minimum wage in January.


4 / Finally, note that qualitative indicators were also quite strong as:
*underemployment rate fell 0.2% to 11.2% (lowest since Sept. 2008)
*employed part time for economic reasons declined 61K to 6790K (lowest since Oct. 2008)
*long term unemployed decreased by 77K to 2693K (lowest since Dec. 2008)


5/ All in all, it was another very strong report but it raised doubts about the current wages’ growth. My guess is that the decline is transitory and we should see a pickup in Jan. The fact is that the labor force is falling while job openings are increasing.  It offers little room for Fed before raising rates. A liftoff in April (in line with Dec. FOMC dots) is less likely given that inflation will remain particularly low in Q1 so that more than ever, June is our base case scenario.

Eight Reasons Why the Fed Will Not “Taper” in September

Wide divergences among economists are felt in polls showing conflicting results concerning the evolution of Feds’ asset purchase program at the next FOMC meeting (Sept. 17-18). The latest poll (Sept. 6) published by Bloomberg suggests that a majority of economists are expecting a slowdown in the Fed buyback program in September:


The Fed will start to cut the monthly asset purchases at the Sept. 17-18 meeting, paring them by $10 billion, according to the median of 34 responses in a Bloomberg survey on Sept. 6, after the jobs data. That’s unchanged from an Aug. 9-13 poll.

However, the NABE (National Association of Business Economists) survey shows contradictory results to the extent that only 10% of economists expect “tapering” at the coming FOMC meeting:


The economists appear to be more cautious in their outlook than Wall Street banks and even some Fed officials that have looked to the central bank’s September 17-18 meeting as a point to begin easing the pace of bond purchases, currently at $85 billion a month.
Only 10% of 220 economists polled expect the wind down to start before the end of September. The survey found 39% expect the first tapering of purchases in the final three months of 2013 with the remainder saying the Fed will hold off at least until 2014.


Concerning the next FOMC meeting, my conviction remains the same since May 25, I do not expect any announcement about a slowdown in the Fed purchase program. Notwithstanding the fact that the expansionary Fed policy poses risks to financial markets’ stability, especially with the increasing volume of speculative positions (corporate high yield, jumbo loans…), at least eight reasons are legitimizing a wait-and-see policy in the short term:


1/ The lack of short-term agreement on fiscal issues, more specifically on the “continuing resolution” and the 2014 budget. Currently, Republicans insist on keeping automatic budget cuts which will take effect during the 2014 fiscal year (starts on October 1st) and will reach $109B (0.6% of real GDP).


2/ The threat of automatic budget cuts, which outcome would not be known from the end of September, comes at a time when growth has been low since the beginning of the year. Indeed, even with an upward revision of the 2Q GDP to 2.5% (QoQ annualized), GDP should increase by 3.1% in 3Q and 4Q to meet the projected 2013 growth defined by the Fed in June (ie 2.45% from 2012 4Q to 2013 4Q).


- Now, if we look at the latest statistics (retail sales, industrial production, durable goods orders…), the trend remains weak and thus far behind the Fed’s target which is partly linked to a slowdown of the buyback program. As a witness, here‘s what Bernanke said at the June press conference:


“If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year”


3/ The signals from the residential housing market are deteriorating. The recent rise in mortgage rates (highest since April 2011) weighed very negatively on refinancing activity (13 declines recorded in the last 16 weeks) but also on new home sales (-13.4% MoM in July). There is no doubt that existing home sales should fall in August, according to the pending home sales’ decline in July (-1.3% MoM).


4/ Inflation is broadly in line (PCE inflation) or below (PCE Core Inflation) the Fed’s forecasts made in June. Anyway it remains well below the 2% target, which is the medium-term reference.


5/ Regarding the labor market, it must be recognized that since the set-up of the buyback program (September 2012), pace of nonfarm payrolls has improved whereas unemployment rate has decreased. However, the last report (August) underlines that the short term momentum of NFPs is weakening and is still below the threshold of 200K which is not a minimum acceptable for Fed:
-> Moving average 3 months: 148K
-> Moving average 4 months: 155K
-> Moving average 5 months: 164K
-> Moving average 6 months: 160K
- Also, as pointed out by the Fed members during the last Fed Minutes, qualitative indicators, namely the number of long-term unemployed (more than 27 weeks), the number of full-time jobs or the “underemployment rate”, are only improving slightly. Similarly, the decline in the unemployment rate is mainly explained by a fall of participation rate (lowest since Aug 1978) which is not a good thing.
6/ The Syrian conflict could create uncertainty to the extent that the debt ceiling has not been raised. The fact is that military action could increase  public spending above expectations and therefore could reduce the time remaining to politicians to find a compromise. Currently, according to Treasury Secretary, the deadline sould be reached by mid-October.
7/ During the G20, IMF noted that currently emerging economies are seen as particularly vulnerable to a tightening of US monetary policy and  recommended that policy makers be ready to handle a rise in financial instability. In this context, Fed could choose to give more time to other policy markers.
8/ Fed communaction: The Fed members have not yet defined criteria or thresholds which would impact the asset purchase program.
- Moreover, since last FOMC, almost all members (voters and non-voters) have instisted on the fact that “tapering” will be only dependent on data which were clearly weaker than expected. The last Beige Book comfirms that activity continued to expand at a modest to moderate pace during the reporting period of early July through late August.
- Finally, some people forget that voters are more “dovish” that non-voters and that they give less press interviews.
- All Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (July 30-31) are available here.