UNEMPLOYMENT RATE NOW WITHIN TOUCHING DISTANCE OF NAIRU ESTIMATEOctober was the ninth consecutive month where the headline payrolls figure came in above 200k, rendering this year’s January to October period the strongest in fifteen years. The US NAIRU may be 5.2% or it may be 5.7%. But wherever it lies, the actual unemployment rate is moving swiftly towards it.
Friday’s Employment Situation Report showed that the US economy added 214k jobs last month. Although weaker than most forecasters – Fathom included – had expected, it was nevertheless the ninth consecutive month where the headline payrolls figure came in above 200k, rendering this year’s January to October period was the strongest in fifteen years.
In its latest policy statement, the FOMC acknowledged that “underutilisation of labor market resources … … gradually diminishing”. Previously, underutilisation had been described repeatedly as “significant”. In our view, the US labour market is tightening rapidly. The four-week moving average of initial jobless claims fell to 279K in the week-ending November 1st – the lowest reading in more than fourteen years. The non-manufacturing ISM employment index can also be helpful in predicting payrolls from time to time, and this rose sharply in October to 59.6. It was the combination of weak initial claims and a strong reading on the ISM survey that had led us to expect a stronger payrolls figure this month; our own forecast was for an above-consensus rise of 300k.
The headline unemployment rate fell by 0.1 percentage points to 5.8% in October. According to the OECD, US unemployment is already below the non-accelerating inflation rate of unemployment, or NAIRU. It is just 0.1 percentage points above the Congressional Budget Office (CBO) estimate of the short-term NAIRU, although it remains 0.3 percentage points above the central tendency range of FOMC members’ forecasts of the longer-run unemployment rate.
The salient fact is that, wherever the precise value of the NAIRU might lie – and there will always be some uncertainty about this – the actual rate of unemployment is closing in on it rapidly. In fact, it is unprecedented for the gap between the actual unemployment rate and the NAIRU to diminish so rapidly while policy remains on hold.
If the labour market continues to tighten then this should soon feed through to stronger wage growth. Growth in average hourly earnings remained at 2.0% in the twelve months to October according to the Bureau of Labor Statistics. But the Employment Compensation Index for private industry workers – the measure that includes wages, benefits and bonuses – rose at its fastest pace in over five years in the four-quarters to Q3. One data point does not seal it, of course. However, the National Federation of Independent Business survey, which has good leading indicator properties, also shows that the net proportion of small firms planning to raise wages is the highest since December 2008.
