December 2016 payrolls report indicates pressures from rising wages

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Unemployment in the US at its lowest level since the 2008/09 recession

The first US labour market report of 2017 (published 06/01/17) showed some deceleration in employment growth in both the payroll and the household survey in December. Upward revisions to the previous two months’ data compensated for the lower-than-expected job growth in December. The unemployment rate ticked up to 4.7% as more people started looking for jobs, resulting in a slightly higher participation rate (see exhibit 1 below for a longer term overview of the participation rate). Using a wider definition of unemployment, including contingent workers (those in temporary jobs) and discouraged workers (people not currently actively searching a job, but who have indicated that they want and are available for a job), unemployment fell to its lowest level since the 2008/09 recession.

Exhibit 1: Changes in the US labour force participation rate between December 2000 and December 2016 (the participation rate is calculated by dividing the labour force by the total working-age population – this being defined as those aged 16 and older)

BLOOMBERG participation rate

Source: Bloomberg, as of 11/01/17

The rate of US unemployment is still somewhat high compared with pre-recession levels (see exhibit 2 below), signalling that there is still some slack left in the labour market. Nevertheless, the US economy is approaching full employment. If this is what explains the slowdown in employment growth then we should also see evidence of faster productivity growth. The shift toward full employment also showed up in the rate of growth of hourly earnings, which jumped to 2.9% YoY.

Exhibit 2: Changes in the US unemployment rate and nominal hourly wages over the period between 1990 and December 2016.

US labour marketSource: Bloomberg, BNPP IP as of 06/01/17

It is not obvious to us from where faster growth in the US could come from

It would be easy to just point to improving sentiment, but this US economic cycle is well advanced. The housing market has shown signs of peaking and while car sales jumped to record levels in December (excluding some incentive-driven surges in the past), further strong growth rates from these levels appear less probable, especially as the delinquency rate on car loans are rising.

Growth of disposable household income has receded somewhat in real terms, mainly due to higher inflation. We do not see inflation as an imminent problem as the trend to higher prices is not generalised by limited to a few categories. We agree with the Federal Reserve’s view that two to three rate rises should suffice this year.

Joost van Leenders

Chief economist, Multi Asset Solutions, CFA charterholder

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