Today’s jobs report was a solid one with nonfarm payrolls rising by 201k, higher than both the 190k surveyed by economists and the 157K of the previous month. The unemployment rate stayed put at 3.8%, but average hourly earnings (a measure of wage growth) came in at 2.9% growth year-over-year, a new cycle high as you can see below.
This report, and the positive headlines associated with it were overshadowed by the Trump administration’s latest salvo in the tariff escalation with China. Bloomberg summarized the news nicely:
“Trump said Friday he’s willing to slap tariffs on an additional $267 billion in Chinese goods, on top of duties of $200 billion in imports is already considering. The administration will act on the $200 billion ‘very soon depending on what happens,’ Trump told reporters on Air Force One. ‘I hate to do this, but behind that there is another $267 billion ready to go on short notice if I want.’”
It’s anyone’s guess what the Chinese response will be i.e. let the Yuan depreciate more, additional retaliatory tariffs etc. We’ll have to wait and see.
OK, back to jobs and wage growth.
As it stands now, the market is pricing in with virtual certainty the Fed hiking rates by a quarter point later this month. An additional hike at the December meeting isn’t as certain, but wage growth numbers like today’s are moving the odds.
After this morning’s job report came out, the odds of a December hike popped up 5% to 67%. The market’s thinking is that lower unemployment will put even more upward pressure on wages causing the Fed to become more concerned about inflation getting out of control (The Fed would presumably want to get ahead of the curve and hike rates to curb future excess inflation, so they’re unlikely to wait until after inflation has risen materially). This dynamic is described by the Phillips curve (which we’ve written about before). What the Phillips curve shows is that as the Unemployment rate falls below a certain level, inflation begins to rise. Here’s Bloomberg’s Carl Riccardonna with his take on what today’s jobs report means in the context of the Phillip’s curve relationship and the Fed’s thinking:
“This result will reassure Phillips curve adherents that labor slack has diminished to a degree at which it is finally having a greater impact on wage pressures. In turn, it will signal to policy makers that the economy is operating in the vicinity of full employment, thereby vindicating those Fed officials who have suggested that the neutral unemployment rate has drifted down relative to previous cycles.”
So, if wage growth continues higher from here, it’s not too hard to imagine the Fed continuing to hike well into 2019.
This morning’s jobs data wasn’t all rosy. Each month, the Bureau of Labor and Statistics issues revisions to prior months’ data. Today’s jobs report revised down the previous two month’s payroll numbers by a net -50k jobs. That takes the 6-month moving average below 200k – not a magic number, but notable.
Of course, this is only one jobs report and as you can see in both the payrolls and wage charts above, the data is noisy. We’ll have to wait and see if subsequent releases revise this data down, or if the current uptrend employment and wages continue. Will the Fed continue to be in “hike mode” despite any economic hiccups at home or abroad? We’ll have to wait and see.
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