US Data Shock

A clear slowdown means that rate hikes may be off the table…

The US Non-Farm Payrolls (NFP) data that was announced on Friday was a complete shocker. For the month of May, the US NFP added just 38,000 jobs as against an addition of over 123,000 jobs in the previous month. The NFP number is a sharp fall of over 70% from the previous month. This is critical because it is the lowest level of jobs addition since October 2010, when the European crisis had first broken out.

But unemployment has fallen…

Despite this sharp reduction in the non-farm payrolls, the rate of unemployment has actual fallen from 5% to 4.7%. How can this be explained? It needs to be remembered that unemployment is calculated on the basis of the number of people willing to offer their services for employment. In this case, there has been sharp increase in the number of people leaving the workforce. This explains why the unemployment rate has been falling despite weak NFP data. This is highlighted by the fact that the labor participation rate has fallen from 62.8% to 62.6%.

Wage earnings are slowing too… 

After growing steadily for nearly 3 months, the wage growth has sort of steadied to negative territory. The wage growth for the month was just 0.2% compared to 0.4% in the previous month. Wage growth has been a critical factor for the Fed decision on rates as it is this wage rise that is going to give rise to inflation. That continues to remain a question mark.

What does jobs data mean for US Fed rates?

When the Fed had started its rate hike plan, it was predicated on 3 broad factors viz. Inflation, economic growth and wages. The Fed was particular that the key driver for inflation would be wage growth. For over 2 years, cheap oil and commodities played spoilsport with inflation. With oil looking to bottom out, the Fed will be keen on ensuring that rising wages help them bring inflation back to the 2% mark. Secondly, economic growth is normally associated with high levels of growth in NFP. But the NFP has sharply fallen in the last month and that is a cause for worry. When the labor participation rate falls sharply, the unemployment figure actually loses its relevance. Thirdly, the Fed wants to link wage growth with rate hikes as growth in wages is inflationary. That does not seem to be the case.

In the past week, Janet Yellen has been indicating that rate hikes may be front-ended. However, looking at the data on NFP, it does look highly unlikely that the Fed will hike rates in June or even in July this year. Probably, if the situation improves, the Fed may consider a rate hike in September or November. For the global markets, that is surely something to celebrate, albeit for now!  ©

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One response

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