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Hiring in the US rebounded last month, but the falling unemployment rate and cooling wage growth garnered more attention.
Following Friday’s jobs report, economists and analysts see the Federal Reserve raising interest rates next month but they do note a few pockets of concern.
Andrew Hollenhorst at Citigroup said the fall in the jobless rate to the lowest level in almost a decade, not the slowdown in wage growth, is the key takeaway from the report.
The main question following today’s job’s report is which matters more for the Fed and the economy – disappointing 2.5% YoY average hourly earnings or the drop in the unemployment rate to a new low of 4.4%. In our view, the unambiguous answer is that lower unemployment – which should ultimately drive wage pressure – is the more important take away.
Michael Feroli at JPMorgan said the “labour market is getting tighter than a rusted lug nut” and also pointed to the drop in the jobless rate. He said:
The headline news on job growth was close to expectations, but the more meaningful development was the surprising further decline in the unemployment rate—down another tenth last month to 4.4%, the same level reached at the lowest point in the last cycle. Even the broad U-6 measure of underemployment clocked a notable decline from 8.9% in March to 8.6% in April. These developments should keep the Fed firmly on track to hike rates again in June and should motivate a hawkish shift in the interest rate forecasts they will release at that meeting.
Ian Shepherdson, economist at Pantheon Macroeconomics, think Fed hawks will see the falling unemployment rate as another indication that the central bank should accelerate its pace of rate increases to curb the risk of the economy overheating.
Given the long lags between rate hikes and shifts in labor market conditions, Fed hawks will now be even keener to see rates rise further, despite the levelling-off in hourly wage growth in recent months. The y/y rate, three-month average, has been 2.7% for the past nine months. They will argue – correctly, in our view – that all the risk is to the upside and the Fed cannot base policy on the hope that wages will somehow fail to re-accelerate even as the unemployment rate approaches 4%. The June hike is more or less done, but we think markets hugely underestimate the risk for Sep, when we expect the Fed to hike again.
Russ Mold, investment director at AJ Bell, said he thinks the report is enough to prompt the Fed to move in June but thinks the report will leave both the central bank and Donald Trump perplexed. He said:
The cooling of wage growth sits oddly alongside an unemployment rate of 4.4% and may both perplex Federal Reserve officials and also concern the President.
While the Fed may not be deflected in its mission to push through two more rate hikes in 2017, weak wage growth may sow some seeds of doubt, while putting into full perspective the size of the task facing Donald Trump when it comes to reinvigorating American economic growth.
Neil Wilson at ETX Capital called it the goldilocks number noting it was “not too hot and not too cold” proving enough to push through a rate increase in June without turning the Fed more hawkish. He said:
Judging by these numbers the US labour market remains in rude health and should offer the Fed all the ammunition it needs to raise rates again in June. After some doubts were cast over the pace tightening by the Q1 GDP miss, the Fed looks justified in thinking this would be transitory.
James Knightly, economist at ING, said there was no pressure on the Fed to hurry its pace of rate rises.
The one disappointment was the fact annual wage growth slipped to 2.5% from 2.6% despite the MoM increase matching the 0.3% consensus forecast. The fact that we are still quite a way away from 3%+ wage growth means that there is no real pressure on the Fed to accelerate the pace of interest rate hikes.
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