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Do No Harm, Payrolls  Keep the Fed on course

Posted by Joseph Trevisani on Nov 4, 2016 5:11:33 PM

American payrolls expanded at a steady pace in October, and wages increased at their best annual rate since the end of the recession keeping the Federal Reserve’s prospective December rate hike firmly in focus.

Non-farm payrolls added 161,000 positions last month following August revised 191,000 jobs, Labor Department data showed on Friday.  Analysts had forecast 175,000 new workers. The two-month payroll revision added 44,000 workers, 35,000 to August and 9,000 to July.  

The unemployment rate dropped to 4.9 percent as predicted. Average hourly earnings rose 0.4 percent for the month, the largest gain since July.  On the year wages rose 2.8 percent, up from August's 2.6 percent gain for the best 12 month improvement in over seven years.

The results will likely confirm the Fed's conviction that the economy is strong enough to tolerate a 0.25 percent hike in the Fed Funds rate at the December 14th meeting. It would be the first hike in 2016 and only the second in over a decade. After the first rate increase last December, the Fed projected four more hike in 2016. But a steep fallen equities in January and February brought on by the Chinese devaluation of the yuan and the Fed's own rate increase plans, followed a sharp fall in job creation in the usd in April and May has forestalled action for rest of the year.

Over the past six months Fed officials led by Chair Janet Yellen have, with increasing frequency, supported a rate increase before the end of the year.

At Wednesday’s FOMC meeting the vote against a Fed Funds increase to 0.75 percent was 8-2 against. At the prior meeting in September the vote against had been 7-3. The FOMC statement at both meeting said the case for a rate increase had strengthen but the governors decided to wait for further evidence.  In the case of this week’s meeting, it was widely assumed that the proximity of the U.S. presidential election on November 8th precluded any action by the central bank. 

Wages gains have be one of the Fed's sticking points in assessing the ability of the U.S. economy to tolerate higher interest rates. While job creation has moderated to 176,000 in the last three months, down from the 196,000 average in the first quarter and 282,000 in the final three months of last year it has been the lack of steady wage growth that has been one of the chief restrains in U.S. economic growth.

For more than five years after the end of the recession, from July 2009 until the end of 2014 annual wage increases averaged 2.0 percent, just 62 percent of the average in the immediately prior two years.  During those five year and five months U.S consumer inflation averaged 1.5 percent a year. With an average wage growth of only 0.5 percent a year beyond inflation there was little extra income to expand the 70 percent of U.S. economic growth beholden to consumer spending.   Consequently economic growth during those years avenged 2.2 percent annually, 30 percent below the U.S. historical average. 

The labor force participation rate, which measures the percentage of working-age people who are employed or looking for work, slipped to 62.8 percent in October from 62.9 percent as 425,000 people left the work force. In all 94.6 million Americans are counted by the government as outside the labor force.  

The participation rate has been declining for more than 15 years from its peak in 2001 at 67.3 percent. The decline has accelerated since the financial crash. For the past five years it has been a lows not seen in over 30 years. In September 2015 the participation rate reached a bottom at 62.4 percent the lowest it had been in 38 years. .

The so-called 'underemployment rate' which charts  folks who are working part time but want fulltime work or have looked for work in the past year dropped to 9.5 percent in October from 9.7 percent. About 5.89 million American employees were in part-time jobs but wanted full-time work.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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