The bullish US jobs report
This morning, the US Labor Department reported a very bullish 321,000 increase in non-farm payrolls in November, well above expectations. Importantly, average hourly earnings showed the biggest gain since June 2013. And hours worked increased as well. This trifecta of statistical data combines with the drop in oil prices to confirm my upbeat view on the US. Some brief thoughts below
This is going to be a short post because I reckon every news outlet is covering this story. So I want to focus just on the salient takeaways here. Let me give you a few data points:
- Non-farm payrolls were up 321,000 but revisions to the previous two months of +44,000 means this report showed 365,000 jobs being added. That’s above the 250-350k trendline I am expecting for the next few months.
- This marks a record 50th straight months of payroll gains in the United States.
- The unemployment rate came in at 5.8%
- Over the past twelve months the total number of jobs added are 2.73 million, the most in over 8 years. The US has now added 2.077 million full-time jobs in 2014, much more than the 346,000 part-time jobs.
- According to Deutsche Bank economist Joseph LaVorgna, aggregate hours worked are on track to grow 3.6% in this quarter. And he notes that is just below the 3.8% gain in Q2 when real GDP grew by 4.6%.
- At the same time, hourly earnings were up 0.4%, putting wages up 2.1% in the last 12 months.
Overall, I would say that with jobs, real wages, and hours worked up and gas prices down, the room for consumption growth has increased in the US. I have been saying we would see a 3%+ number for consumption in Q4 and I believe the risk is to the upside.
In terms of what this means, the first thing to note is that it means the US is well beyond stall speed. As I have been saying, it will be difficult to dislodge the US from the current track with exogenous shocks. The US domestic economy would have to deteriorate significantly for the US to weaken. And there are no signs of this. Real wage growth is increasing, hours worked are up, job growth is accelerating somewhat, inflation is contained and the ISM new orders component is at a cyclical high, suggesting production will keep humming along for at least the next few months. In short, the jobs report is extremely bullish for the economic outlook in the US.
A bullish outlook means two things; it pulls forward rate hike expectations and raises real interest rates as a result. And it also increases the value of the dollar vis-a-vis major trading partners. For example, Canada lost over 10,000 jobs in their report this morning. And this is even before the slowdown in oil sands capex has a chance to be felt. We should expect more job weakness in Canada and that means interest rates will remain on hold, putting downward pressure on the currency.
Because the US economy is so large and because trade is a small percentage of GDP, it is better insulated against exogenous shocks such that the increase in the dollar will not be as damaging to US growth. The potential increase in rates is more of a concern. But here I would be cautious about what rate rises mean because right now they should mean increased demand for credit as companies try to lock-in rates before they increase further. And if the Fed does pull the trigger on the Fed Funds rate, it will also mean increased interest income for households and banks as net interest margins expand with a steepening yield curve.
I have nothing bad to say about this report. It is bullish all around. And to the degree we see wage growth on the back of it, that’s even better. US equities are expensive but with these data, they are probably going to get more expensive. Party like it’s the 1990s because the data are beginning to look like that 90s show.