Updated: Jan 13, 2020
The headline number of jobs added to the US economy in December was 145k, slightly less than the expected 164k. More disappointing was average hourly earnings growth, which fell to 2.9% against expectations for it to remain unchanged at 3.1%.
Those hoping for increased demand-pull inflationary pressures, i.e. the Fed, will be disappointed by this; realistically, higher wage growth will be needed if inflation is going to sustainably converge back towards the Fed’s 2% target. The potential implications of this soft wage growth data is likely the primary reason as to why USD knee-jerked lower in the aftermath of the data; as we know, lower inflationary pressures (such as wage growth) equals lower rates for longer.
However, market participants quickly pointed out that the underlying economic picture for the US labour market remains strong. 145k jobs added is by no means a bad number, while the unemployment rate held at historic lows. “The data highlights the sustainability of the expansion” some said, in that the unemployment rate is still low and labour market still healthy, but lower earnings growth is helping to reduce any inflation fears that would see Fed hike (which could threaten the longevity of this expansion). In sum; if the underlying picture for the US economy is still good, why should USD sell off?
Some may be inclined to frame this report as “goldilocks” data, i.e. data that is not too good that the Fed wants to hike, but not so bad the market begins to fear a recession. Given the lack of upside seen in US equities at the time of the report, which often rally on “goldilocks” data, I would suggest this is too rosy of a view. Nonetheless, US equity indices remain just off all-time highs.
An observation that I would add is that soft average hourly earnings growth could be indicative that the participation rate has further room to run to the upside. The unemployment rate is at historical lows, which typically is associated with higher earnings growth, as employers compete for an ever-lower supply of workers. So why is wage growth moving lower instead of higher?
Because, actually, there is still a decent supply of workers; it seems more and more of those who had previously left the workforce (and thus were no longer counted as unemployed) are returning, keeping wage growth in check. The participation rate has been steadily on the rise since 2010, after it plummeted during the global financial crisis but is below its pre-crisis levels.
If more of these economically disenfranchised people keep returning to the jobs market, any upside for wage growth may be limited. An increasing participation rate would, however, serve as a boost to the wider US economy.