Last week we had a big flow of positive US data. The headline US unemployment rate has decreased from the previous 6.1% to 5.9%, with a change in non-farm payroll adding 33k more jobs than expected, almost doubling the August figure of 142k. As a result, markets have shifted the expectation of rate hike sooner than summer 2015, driving the dollar higher with GBPUSD breaching the psychological level of 1.60. Despite the prevailing optimism, looking at the employment report in more detail reveals cracks in US labour sector:
1. Labour force participation
It’s all about perspective. Although the unemployment rate is at the lowest level since 2006, the labour participation rate is at the lowest rate since 1977 (chart I) at 62.7%. The number of people not in the labour force has reached a record high 92.6 million. Partially this can be attributed to retirement (baby-boomers retiring) and partially to the disgruntled and disillusioned Americans that leave labour force after a long period of unsuccessful job-seeking. Hence, as long as the unemployment rate keeps falling proportionately with the decline in labour force participation (chart II) the Fed and the US administration should ease up on the optimism.
Chart I: Labour force participation rate in the US as a % of population
Chart II: Labour force participation NSA vs. unemployment rate in the US
2. Wage growth and spending
Despite the stable economic recovery and GDP growth in the post-crisis America, wages have not experienced a proportionate increase. In the long-term perspective, the growth pace hasn’t been quite as good, considering that we have dipped below zero twice in the past 5 years. This raises the question about the quality of the jobs added to the economy (we will elaborate on this more in point 3.). In addition, the US jobs turnover is the highest this century, just under 5 million jobs opening on the last business day of July 2014 according to the Bureau of Labour Statistics. Primarily, this is due to the high paying jobs lost during the recession being replaces with a low paying jobs prevailing at the moment. Partially, this can also be attributed to the high job turnover that prevents employees from “building up” their wages.
Chart III: US Average Earnings % Change
3. Job composition
It’s not all about quantity it’s also about quality. The recent growth has been driven by the services sector that has account for 85% of jobs growth over the past year, adding 219,000 in September. Looking at the breakdown below, the financial activities, construction, education and health services have either remained stagnant or decreased the number of positions. Meanwhile retail trade, leisure and hospitality and professional services have been skyrocketing.
Chart IV: US jobs added in September 2014 by sector
Source: Zerohedge.com (available here)
Implications for FX
As the title of this report highlights, appearances can be deceiving, especially in the short-term.
In the near future, the USD strength momentum is likely to continue as the markets are looking at it from a simplistic standpoint. There is a reason why Janet Yellen emphasised that the Fed will look at the overall health of the labour sector when considering rate hike. As such, the sooner rate hike expectations are likely to fizzle out and return back to summer 2015. Hence, in our view the dollar has strengthened too quickly and the downward correction is likely to follow.
Author: Zarina Nasib