Schroders Quickview: US economy motors into 2015

Another month and another solid employment report, with the US economy clocking up an increase of 252k in non-farm payrolls in December.

9 January 2015

Keith Wade

Keith Wade

Chief Economist & Strategist

Figures for October and November were revised up and for the year as a whole the US added 2.95 million jobs.


Given the added stimulus which will come from the latest fall in oil prices and mortgage rates, we are sticking with our view that they start to move in June and begin the process of normalising interest rates.

The gains in payrolls were slightly ahead of expectations as was the drop in the unemployment rate to 5.6%. Some will dismiss the latter as it partly reflects a fall in the participation rate to 62.7%, levels not seen since the late 1970s. However, as regular readers of our reports will know, we see this as a structural trend, which has been in place since 2008 and reflects the ageing of the US workforce, rather than a sign of weakness as workers become discouraged and give up searching. We are unlikely to see a change in this trend in the near future, with the result that the unemployment rate is likely to fall further in the coming months and end the year below 5%.

The crumb of comfort for the doves in this month’s report was the weakness of wage growth, with average hourly earnings actually falling by 0.2% and decelerating to 1.7% year-on-year. Tepid wage growth remains a puzzle as a tighter labour market should be causing pay to accelerate. Recent research from the San Francisco Federal Reserve suggests that there has been a delayed reaction in pay growth as firms were unable to adjust wages as much as they would have wished to during the downturn due to nominal wage rigidity. Nonetheless, one would expect this period to eventually come to an end: if growth remains solid and the unemployment rate continues to fall, wages will pick up.  And growth is solid: total hours worked in the economy, often seen as an indicator of real GDP, rose at an annualised 3.5% in the fourth quarter. 

The Federal Reserve will continue to balance low inflation and a weak external environment against the strength of the domestic economy. However, given the added stimulus which will come from the latest fall in oil prices and mortgage rates (now back to May 2013 levels, pre-taper tantrum) we are sticking with our view that they start to move in June and begin the process of normalising interest rates. 

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.