US Watch
Group Economics
Macro & Financial Markets Research
Maritza Cabezas, +31 20 343 5618
Unemployment beats Fed forecasts
7 November 2014
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The October nonfarm payrolls report (+214K) suggest that employment continues to grow above trend.
The unemployment rate fell to 5.8% below the Fed’s end of year forecast. Both indicators suggest that
the economy continues to support progress towards maximum employment.
The labour market data strengthen the case for a Fed rate hike in June 2015.
Job growth remains strong in October
firms to lower nominal wages during the recession, leading
The employment recovery remains on track. US nonfarm
them now to be more conservative in rising wages to attract
payrolls advanced by 214K in October, following a gain of
qualified workers. But as the degree of slack declines, she
256K the month before. The revisions of the past two months
adds that wages could rise at a rapid pace. We think that we
added 31K jobs. The change in nonfarm payrolls was slightly
are at the beginning of this process. Indeed, wages reported in
below the consensus forecast (235K). Looking at the details,
the US Employment Cost Index in the third quarter rose by
the report shows signs of some payback after a particularly
0.8%, the largest increase in six years.
strong report in September. Only manufacturing gained 12K
compared to the previous month. But job gains in other
Labour costs begin to move higher
categories remain solid. In the period January – October,
%yoy
%
average job growth was 227K and the unemployment rate
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9
8
7
6
5
4
3
declined by 0.9 percentage points in this same period. Indeed,
the unemployment rate in the household survey fell to 5.8% in
October from 5.9% the previous month.
Underlying indicators improving…
The participation rate is a closely watched indicator by the
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4
3
2
1
0
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2000 2002 2004 2006 2007 2009 2011 2013
Fed’s policymakers. This indicator shows the share of workingage people in the labour force. It edged up 0.1 percentage
points to 62.8%, after two straight months of declines. The
Wages - Employment Cost Index (rhs)
Unemployment (lhs)
participation rate has been flat at low levels, despite the strong
job growth. This is a result of workers retiring and people
Source: Thomson Reuters Datastream
having left the labour force in the past due to a weak labour
market and not returning. The Fed’s dilemma is whether loose
Unemployment rate already within the Fed’s target
monetary policy will bring these workers back to the labour
The unemployment rate of 5.8% in October is below the
market or whether additional easing will only encourage
central tendency projections of the FOMC, which are at 5.9% -
inflation pressures. We think that retired workers leaving the
6% in the fourth quarter of 2014. It is also close to the end of
labour force is the key driver of lower participation rates, since
2015 range of 5.4% - 5.6% and its long run projection of 5.2% -
a measure of unemployment that partially takes into account
5.5%. It is no wonder that Fed policymakers struck a positive
worker discouragement, the U6 report, continued its downward
tone in last month’s FOMC statement in which they ended the
trend, falling to 11.5% in October from 11.8% the previous
asset purchase programme. FOMC members pointed explicitly
month.
to “solid job gains and a lower unemployment rate” and noted
that
“underutilisation
of
labour
resources
is
gradually
…but wages remain sluggish
diminishing”. This is an important shift since the more dovish
The missing piece in the labour market continues to be wage
FOMC members had often used ‘significant slack’ as an
growth. The employment report showed that average hourly
argument to maintain accommodative monetary policy. The
earnings remain flat despite the improvement of the labour
labour market data makes a rate hike in June 2015 more likely,
market, reporting a 2% yoy change in October, far below the
which is more or less what the FOMC members have been
long-term average. For Fed Chair Yellen, the sluggish pace of
signalling. This is also in line with our forecast. However,
wage growth is a reflection of the inability or unwillingness of
financial markets are positioned for a later rate hike.
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Unemployment beats Fed forecasts – 7 November 2014
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