What a good US jobs report will mean for markets

The US jobs report is out on Friday and it's set to be a good one. That said, payrolls growth has undoubtedly slowed this year with the 6M moving average currently at a 17 month low of 174,500. The government shutdown probably played its part, restricting employment growth for both federal workers and government contractors, while more recently anxiousness over the US-China trade tensions may also have tempered hiring plans to some extent. However, most labour market data releases continue to suggest demand for workers remains very firm.

For example, the ISM manufacturing employment index rose to 54.5 in June - a three month high with the index back above its 6M moving average. Then there is the National Federation of Independent Businesses survey which reported that 21% of members “plan to hire” new workers – a five-month high. So even with the negative headlines surrounding trade, US businesses still seem in a strong position with a clear appetite to find workers.

Instead, the slowdown in hiring appears to be more due to the lack of suitable workers to fill those vacancies. The latest Federal Reserve Beige Book, published just ahead of the June FOMC meeting, suggested that “stronger employment growth continued to be constrained by tight labor markets, with Districts citing shortages of both high- and low-skill workers.” Meanwhile, the NFIB survey suggested 38% of firms could not fill the vacancies they currently have, primarily because there aren’t available workers with the right skill sets.

With the labour force participation rate running at just 62.8%, there is the lingering hope that some potential workers will re-enter the labour force, especially given the pick-up in wage growth. However, we've been looking for that for a considerable period, and there is little evidence to suggest it is happening. Therefore while we expect payrolls to rebound from the surprisingly weak 75,000 reading in May, we doubt it will be enough to drag the 6M average meaningfully higher. We look for payrolls growth of 170,000. The consensus is 164,000 within a range of expectations of 100,000 to 205,000.

Like payrolls growth, wages have disappointed a little this year, especially given surveys suggest that competition for workers continues to heat up. Monthly wage growth has been average a little over 0.2%MoM year to date, but we look for a month-on-month increase of 0.4% in June to reflect both the competition for workers, but also the technical point that there were only 20 working days in June versus 23 in May.

If you are receiving a monthly salary when it is converted into an average hourly wage rate it will look substantially higher if there are fewer working days (and therefore fewer working hours) in the month. We saw an identical move in February (20 working days versus 23 working days in January) and average hourly earnings growth rose 0.4%MoM, the best monthly growth for the year so far.

Add in the competition for labour, which is bidding up pay and we are more confident than usual in our above-consensus call for US wage growth. Note the commentary from the Federal Reserve’s June Beige book – “Competition for workers reportedly applied some wage pressures across a wide range of occupations and induced improvements in benefits to attract more workers and to improve retention of existing employees, according to several Districts.”

The unemployment rate dropped to 3.6% in April and stayed there in May – the lowest level since December 1969. We expect it to remain there again this month but the balance of risks are more to the upside than the downside given slowing employment growth and the outside possibility that higher wage growth may attract some people back to the labour force.

The participation rate has fallen from 63.2% in February to 62.8% currently, which is difficult to explain fundamentally. It tends to be quite a choppy series so if we do see that move higher once again it would make a 3.7% unemployment rate look more likely. A higher unemployment rate, for this reason, would certainly not be a signal we should be concerned. If anything it would be a perfectly understandable development where employment growth is slowing due to a skills miss-match, with competition for workers driving up pay, which attracts people who had left the labour market (early retirement for example), back into the jobs market.