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December Rate Hike Now Likely After Jobs Report

Fri, 6 Nov 2015

Barring a data disaster between now and the Fed's next meeting, October's strong data should lead the Fed to modestly raise short-term rates, says Morningstar's Roland Czerniawski.

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Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a much-better-than-expected 271,000 jobs last month. I'm here with Roland Czerniawski--he's a markets-research analyst at Morningstar--for his take on this report.

Roland, thanks for joining me.

Roland Czerniawski: Great to be here.

Glaser: Let's look at this report. This number was well above expectations. Is it as good as it looks on the surface or is there something lurking below here?

Czerniawski: I think it does look really good. I think this is a good report with good quality of improvements. As you mentioned, there were 271,000 jobs added. We had a previous month revised slightly lower to 137,000, which is not a big deal; but overall I think there were good improvements, and the gains were spread among many categories. The unemployment rate ticked down to 5%, and that's despite the actual increase--a very small but nonetheless an increase--in the number of labor-force participants. We've seen involuntary part-time work go down. And I think, overall, the employment growth continues. Total nonfarm employment growth continues to grow at about 2%, which is a healthy growth rate. The total private employment growth continues to grow at about 2.3%, which is slightly slower than in the beginning of the year when it was at about 2.6%, but it's still faster than in 2014. So, these are still healthy and stable rates. I think this report really shows that the recent employment weakness was probably just a temporary fluke. This is showing a good rebound.

Glaser: When you look at the sectors, where are jobs being added? Any changes in the trends there?

Czerniawski: Yes, I think so. As I mentioned, the job gains were really strong, and they were spread among many categories. But I would say that, overall, the categories that had been doing well previously continued to do well and categories that maybe have been a little bit slower stayed that way.

On the good side, we have construction adding 31,000 jobs, which is good news for the U.S. economy and for the housing market, in general. We have retail and accommodation and food services adding 44,000 and 42,000 jobs, respectively. That's much faster than the 12-month average for these categories, and that's really representative of the strength of those consumer-based industries. We have healthcare and professional and business services adding 57,000 and 78,000 jobs, which are really big numbers--again, way above their 12-month averages. So, I think it just shows how good the services industries are doing and that the services economy, in general, is doing well. That's really where the most jobs are.

On the not-so-good side, yet again we have the manufacturing and mining industries. This is something that we talked about last time. Because of the strong dollar and weaker exports and low commodity prices, some of these goods-producing industries are experiencing a little bit of weakness. But I think what's encouraging is that we're seeing now that the pace at which these industries are losing jobs is diminishing. So, that's certainly a good news. But I think it will still probably take some time for this trend in the goods-producing side of the economy to reverse.

Glaser: One of the things we've been looking for is wage growth--something we maybe haven't seen so much of even as the employment market has gotten better. Any signs that employers have to pay a little bit more to keep their workers now?

Czerniawski: We had a big positive surprise in this report, and that was the hourly wage growth. That improved 0.4% in October, and that actually translated to about 2.5% year-over-year nominal hourly wage growth. That is the fastest year-over-year pace of wage growth since 2009. So, that is a very good number. It's really encouraging to see. I think we probably will need to see a number of employment reports that show this trend continuing before we can make any strong judgments about whether this is the beginning of wage growth picking up finally. But this was encouraging. The hours worked stayed flat, and I think this was widely expected at this point. It's really difficult to move this number much higher.

The total nominal wage growth--which is a combination of employment growth, hourly wage growth, and hours growth--stayed at about 4.7% to 4.8%. In absence of inflation today, it's a very good number that translates into a lot of disposable dollars. So, I think that's good news for consumers.

Glaser: So, we had a strong, broad-based report about wage growth. What does this mean for December and the Fed? How much higher is the likelihood that there is going to be a rate increase in December?

Czerniawski: I think when we met last time we mentioned that, in absence of above-average data--I think this was last week or maybe two weeks ago--the chances for December's hike were about 50-50. I think this report changes that picture. I think now a hike in December is probably a most likely outcome. I think that the Fed has been looking for assurance that the recent employment weakness has been just a temporary phenomenon and that the inflation will return to the 2% level. I think this report provides some of that assurance. The strong jobs gain show that employment is growing at a strong pace and that the recent weakness was probably temporary.

The wage-growth number, while it's a single-month number, still does probably support the theory that inflation might be returning to its target in the medium term. So, I think if the Fed was looking for assurance, they might have found it in this report, and Janet Yellen made some comments this week suggesting that they're really looking for reasons to raise. They are probably realizing that they are running out of time a little bit. So, I think this report provides them with some of the reasons why they could raise rates and, in my opinion, without a major data disaster between now and December, I think a [25-basis-point increase] in the fed-funds rate during the next FOMC meeting is probably the most likely outcome.

Glaser: Roland, I appreciate your analysis this morning.

Czerniawski: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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