For the Federal Open Market Committee, this morning’s Non-Farm Payrolls was just fine.
The key number for the Fed wasn’t just the 156,000 job gains in September — which was more than adequate to indicate a more than healthy labor market — but the two key sub-component numbers that both look to be further “strengthening” the case for a rate move before year-end.
*** The Labor Participation Rate went up to 62.9% from 62.8%, indicating the discouraged and longer term unemployed are indeed being pulled back into the labor market despite its demographically-driven secular decline. Average Hourly Earnings also ticked up to an annualized 2.6% from 2.4%, evidence of the expected wage growth in a “higher pressure” labor market. ***
*** Indeed, despite the modest downshift in the market probabilities pricing for a December rate move, we still think a rate hike at the Fed’s mid-December meeting is still likely (SGH 9/13/16, “The December Fallback”). Our higher odds reflect our sense of a still solid Committee consensus that a second rate hike in the policy normalization path will be warranted before year-end. ***
A few takeaways from the NFP:
The 156,000 jobs gains in September — and a three month rolling average of 192,000 — is still well above the monthly 120,000 or so that the Fed believes the level needed to keep soaking up the remaining slack in a labor market that is at or very near the estimates of its longer run levels.
More to the point in terms of where the forward looking indications are for the health of the labor market, the movement in the headline unemployment rate up or down or by .1% from month to month, or a 5% versus 4.9% unemployment rate, is almost besides the point at this stage.
Instead, the Fed focus has been shifting from the monthly jobs number to the participation rate and to indications that wages are rising more broadly. And on both counts, this month’s NFP was straight down the line with the Fed’s base case expectations.
Only a weakening across the economic data in the coming months would put a dent in the FOMC consensus for a December rate move, and there is simply no evidence of the economy slowing so much or so quickly that it threatens a stall speed that would derail the steady gains in the labor market.