Fed Outlook Still for Hikes on Strong U.S. Hiring

By:  David Sloan Posted:  14 Mar 14:12

Bottom line: Today’s U.S. employment report shows strong hiring, but no real acceleration in wage gains. That leaves the Fed rate outlook much as it was—at least three hikes this year, a March hike assured. Whether the next Fed hike will come in June or September is a close call, but there will be more news on this point next week.

Figure 1: Employment Gains are Solid Early in 2017 (Payroll Employment)

Source: U.S. Bureau of Labor Statistics, Roubini Global Economics

U.S. payroll employment gains so far in 2017 are running nicely ahead of last year’s pace, with a gain of 235,000 jobs in February following 238,000 gained in January. That is well beyond the pace needed to absorb new labor market entrants and indicates the labor market is still tightening.

At this point, it is impossible to overstate the odds of a Fed rate hike on Wednesday. Whether the next FOMC rate hike will come in June or September is a tough call at this point—today’s data don’t do much to clear up that issue. Job growth is strong but likely to slow, while wage gains are accelerating only modestly. Next week’s FOMC meeting is likely to shed more light on this question. 

Job gains so far this year have been particularly strong in the goods-producing sectors. Factory hiring so far this year is the strongest in any two-month period since late 2014 and is quite widespread. Mild weather has helped boost construction employment growth to the fastest two-month pace since late 2015. That bump will fade with the arrival of spring.

There are other reasons to suspect that hiring will slow in coming months, though we expect it to remain healthy. The average workweek is at a moderate 34.4 hours, so there is opportunity to give workers more hours in place of hiring more workers. Output usually leads employment, and GDP growth does not appear to be accelerating in Q1.

Figure 2: Average Hourly Wage Growth Has Moderated

Source: U.S. Bureau of Labor Statistics, Roubini Global Economics

In addition, the labor market is tightening and reports of difficulty finding qualified workers are on the rise, so a tight labor supply may constrain hiring, along with moderating demand. Tightness in the labor market is raising wages, but still only slowly. Average hourly earnings were up 2.8% year-over-year in February, which matches but does not exceed the high for expansion. At least for the next few months, it seems unlikely that 2.8% mark will be topped. As long as wage gains remain at this pace, the pressure on the Fed to accelerate rate hikes will be muted.

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