Healthy U.S. jobs report points to early rate hike
The unemployment rate fell to a fresh cyclical low in November, and while wage growth disappointed, we expect it to pick up progressively next year.
US non-farm payroll employment rose by a healthy 178,000 month-on-month (m-o-m) in November, in line with consensus expectations. Unexpectedly, the US unemployment rate fell further in November, to 4.6% from 4.9% in October, reaching its lowest level in more than nine years. At 4.6%, the US unemployment rate is now below the median rate of 4.8% that policy makers at the Fed feel corresponds to full employment. And the U6 measure of underemployment also fell to a fresh cycle low of 9.3%.
Wage data disappointed. The year-on-year increase in wages fell to 2.5% in November. However, this series is notoriously volatile and the pace of increase recorded the previous month (2.8%) was a cyclical high. In addition, aggregate weekly payrolls (a proxy for household income) grew quite strongly between Q3 and October-November. For our part, we continue to expect wage increases in the US to gradually pick up over the coming quarters.
All in all, today’s employment report was reasonably encouraging. Job creation was healthy and both the unemployment rate (U3) and the U6 measure of underemployment declined to fresh cycle lows. And while the y-o-y pace of wage increases fell back in November, this was only after having reached a cyclical high in October. All this reinforces the probability that the Fed will hike rates by 25 bps in December.
We are not modifying our scenario for US economic growth and monetary policy in light of the latest statistics. Our forecast that US GDP will grow by 1.5% q-o-q annualised in Q4 remains unchanged, as do our projections for yearly average growth of 1.5% in 2016 and 2.0% in 2017. And we continue to expect that a December rate hike will be followed by two more 25bp rate rises in 2017.