December rate hike likely after US jobs boost

Quickview: Latest data paints a rosy picture for US employment and wage growth, and supports the case for a further rate hike in December.



Janet Mui
Global Economist, Cazenove Capital

Although there may have been some impact from October’s hurricanes on the latest nonfarm payroll data, we believe the underlying trend in employment and wage growth remains positive.

Robust fundamentals in the US labour market supports another Fed funds rate increase in December, and will keep the Federal Reserve (Fed) on track for further policy normalisation in 2019.

The nonfarm payrolls showed that 250,000 jobs were added in October, well above the consensus expectations of 200,000 and up from 118,000 in September. The 2-month net revisions were zero.

On average over the past three months, 218,000 jobs were added, exceeding the previous 200,000 trend. The strong labour market attracted more workers back to the labour force, as the participation rate rose from 62.7% to 62.9%.

While the headline unemployment rate was unchanged at 3.7% as expected, the broader measure of the rate of labour underutilisation (U-6) ticked down to 7.4% (the lowest since April 2001) from 7.5%, suggesting further erosion of slack in the labour market. The U-6 rate includes discouraged workers who have stopped looking for jobs and also includes part-time workers seeking a full-time job.

Despite an increase in labour supply, average hourly earnings accelerated from +2.8% year-on-year to +3.1% year-on-year in October as expected. This is a new high for the cycle.

The gains in wage growth were broad-based in both goods-producing and services sectors. The upward trend in wage growth over the past year is clear evidence that the tight labour market is generating more wage pressure.

The rise in employment with higher wage growth is positive for consumer aggregate income, and will help to offset the impact of higher energy prices, hence we expect strong household consumption to persist.

Cazenove Capital is part of the Schroders Group.


Janet Mui
Global Economist, Cazenove Capital


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