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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.

August Employment Report Does Not Support “Tapering” in September

According to the Bureau of Statistics, total nonfarm payrolls increased by 169,000 in August (below expectations), and the unemployment rate fell 0.1% to 7.3% against 7.4%e. The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour in August to 34.5 hours while average hourly earning decreased 0.2% MoM:


From BLS:


Total nonfarm payroll employment increased by 169,000 in August, about in line with the average monthly gain of 184,000 over the prior 12 months. In August, job growth occurred in retail trade and health care, while employment in information declined. Employment continued to trend up in food services and drinking places, professional and business services, and wholesale.
The change in total nonfarm payroll employment for June was revised from +188,000 to +172,000, and the change for July was revised from +162,000 to +104,000. With these revisions, employment gains in June and July combined were 74,000 less than previously reported.
Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3 percent, changed little in August.
The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour in August to 34.5 hours
In August, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to $24.05
In August, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged at 4.3 million.
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined by 334,000 to 7.9 million in August.

I – My view:
1/ Nonfarm payroll figures were below expectations and data from June and July were revised downward. As a consequence, 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

2/ The decline in the unemployment rate to 7.3% in August, was due to a decline in the participation rate (lowest since Aug 1978). If the participation rate had held steady, the unemployment rate would have increased to 7.5% instead of declining to 7.3%.

3/ Concerning qualitative indicators, even if the number of unemployed people decreased (-198K), long-term unemployed (those jobless for 27 weeks or more) increased by 44K.


II – Implications on Fed:
Even if labor market conditions are improving slightly, we are far away from Fed’s targets. Most of qualitative indicators were little changed in August and the fall of unemployment rate is only explained by a fall of participation rate which is not a good news.
Therefore, my conviction remains that consensus view of “tapering” in September is not realistic.