Strong wages a silver lining in an otherwise uninspiring NFP

The number of jobs created in the final month of 2016 came in at 156k, missing the expected rate of 175k. Unemployment ticked up, as expected, to 4.7%. whilst hourly wage growth beat forecasts coming in at 2.9%.

December’s 156k jobs created, although less than anticipated, it is still an acceptable number albeit rather lacklustre. Psychologically the markets have been focusing on 200k as the magic number each month, but given that the Federal Reserve has stated that around 100k jobs need to be created each month to sustain the current employment rate, we are well within the boundaries. However, the headline story today was the level of hourly wage growth – the highest in almost 8 years.

Wage pressure

Hourly wage growth surpassed expectations; up until now wage pressure has been extremely slow feeding through, despite the consistently strong increases, month after month, in the number of jobs created and the falling unemployment rate. Historically wages are considerably higher when unemployment has been so low, but that is not what we have seen this time round. One reason for this is that inflation expectations have been low, meaning that people are less aggressive in pushing for higher wages and employers are less inclined to increase wages. However, this is set to change as Trump takes the helm and the outlook for inflation has increased significantly; therefore, going forward we should expect to see hourly wages rise to a level more akin to the unemployment figure.

Obama / Trump

This was the last non-farm payrolls release under the Obama administration and concludes an impressive track record of job creation for the outgoing President. In the US, job creation topped 2 million in 2016, for the sixth straight year. Since 2011 over 14.3 million jobs have been created and the US is sitting close to full employment with an unemployment level of 4.7%. Making Trump’s aim of job creation that bit more challenging.

Trump has repeatedly stated that job creation is one of the most important goals of his administration and he has made no secret of his objective to add 25 million jobs in the US within the next 10 years. This is extremely ambitious, especially given that so many jobs were created throughout the Obama administration, however it is not impossible. When we look at the labour force participation rate (rather than the unemployment rate) which it is sitting only at 62.7%, it is still some distance from the 66% it was at prior to the 2008 crash, so although there are many comments that we are at full employment, this may not actually be the case and there is still room for further job creation in the Trump administration.

Market reaction

Going into the report the Federal Reserve were looking at 2 possible 3 rate hikes next year. Following this report and with knowledge of the solid wage figures that are being produced, the Fed could be encouraged to sit closer towards 3 hikes over the course of the year. Wage growth implies inflationary pressure which reaffirms the Trump Trade. This has worked through to the markets where, post report, we have seen a fall out on the bond market with yields moving higher and a bid back in the dollar, putting the brakes on recent profit taking.