US labour market: this is the annual hiccup

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Economic surprise indices have on the whole remained highly positive in the US, although the latest US labour market report disappointed, with non-farm payrolls growth for March coming in at 98 000 versus market expectations for 180 000 new jobs.

Red herrings

We have seen the occasional weak data print in other years as well – last May and March of 2015, for example – and these ultimately proved to be red herrings. We suspect the same will happen with this jobs report, particularly as the headline number is an outlier relative to other indicators of a healthy (and indeed, increasingly tight) labour market. Importantly, the household survey registered quite strong job growth, which combined with a steady labour force participation rate pushed the unemployment rate to a cyclical low of 4.5%.

Also encouragingly, the broad U6 unemployment rate, which accounts for marginally attached labour market participants as well as part-time workers seeking full employment, declined notably and now appears to be consistent with full employment.

No need to change our view…

The household survey is notoriously volatile, so we would not put too much weight on these numbers. But looking across both surveys for March, we see little to alter our view that labour demand remains solid and that signs of a shortage of skilled workers are becoming increasingly common. Wage growth has basically stalled at around 2.7% YoY since September last year. Such sluggish growth may be related to low productivity, but at some point, the labour market will have tightened by enough to generate faster wage growth.

…or that of the Fed

In general, the Federal Reserve has sounded more hawkish this year, pointing at a further two to three interest-rate rises after the one in March. But the focus is also on the Fed’s balance sheet, which has been bloated by now past asset purchases, mainly of bonds.

At long last, in the minutes of the March FOMC meeting, the policymaking committee has begun to communicate its plans, with most participants expecting that a change to the bond reinvestment policy would likely be appropriate later this year. This was not far off market expectations. In the New York Fed’s pre-meeting surveys of market participants and primary dealers, respondents generally expected balance sheet run-off to begin either in the final quarter of this year or the first quarter of 2018. This likely explains the relatively muted market reaction to this news.

In fact, the most significant news on the balance sheet was in the New York Fed’s under-appreciated annual report on open market operations. In the report, New York Fed staff assumed a baseline of USD 500 billion in excess reserves at the end of balance sheet normalisation. Indeed, this assumes about USD 1.5 trillion of US Treasuries and agency MBS will be run off within four years.

Published 13 April 2017

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