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What's a good payrolls number these days?

07 October 2016
FOMC, US GDP
The US Federal Reserve, along with many other central banks, has a pretty challenging job right now given uncertainties about economic growth and, in particular, the future path of inflation. US GDP growth is running at around the lowest level since 2013 and looks like coming in at around 1.6% (annual average) in calendar 2016. Not great, but a long way short of the recession the market was fretting about back in January.  
 
The problem for the Federal Open Market Committee (FOMC) is that the US economy's potential growth rate (the rate of non-inflationary growth, which we calculate as the sum of growth in productivity and working age population) is also disappointingly low. While there are questions about the validity of the data, particularly productivity, the important point is that low growth can still lead to the absorption of spare capacity and inflation pressure when potential growth is also low.
 
That's why the FOMC pays so much attention to the various measures of capacity utilisation, the most obvious of which is the unemployment rate. The upcoming release of September labour market data will be the next critical part of the FOMC's deliberations about whether to hike interest rates this year.
 
We think the US labour market is in pretty good shape. After a weak result in May, monthly payrolls growth has bounced back to average 232k per month.
 
One survey we pay close attention to is the Job Openings and Labour Turnover Survey (JOLTS). That particular survey has job openings at a record high levels and the quit rate is also trending higher. The quit rate is the proportion of the labour market that is quitting their job with the not unreasonable assumption that they are quitting one job to go to a better job with higher remuneration.
 

 
But be careful what you look at. With the labour market now close to full employment, it's not unreasonable to assume that jobs growth (change in non-farm payrolls) will slow as skills shortages emerge and firms turn to investment to resource the future growth in demand for their good and services (which should also help the productivity problem).
 
That raises the question about what a good payrolls number now looks like. It's useful to think of a level of monthly payrolls growth that stabilises the unemployment rate. We have a pretty good signal from Janet Yellen herself about that ‘breakeven’ level which in a speech last year she suggested was under 100k per month. In a more recent analysis, San Francisco Fed President suggested it was around 80k per month. Those estimates obviously also have assumptions about the likely path of growth in working age population (slowing) and the participation rate (stabilising).
 
Being conservative, that suggests growth of anything over 100k per month is still a good print for payrolls. So a reduction in the recent trend rate of growth from the recent 200k per month is not necessarily a bad thing, and should even be expected.
 

 
The key data though is wages. While wage growth is off its lows, it is now largely moving sideways at just over 2% per annum for the last few months. This is the key number to watch on Friday (or Saturday if you're in our part of the world).  And remember not to get distracted by a ‘low’ payrolls number.

 

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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