Jobless Rate Falls Below 5%
Another month, another data point in favor of raising interest rates in the United States.
By wide acclaim, the 161,000 jobs created in the U.S. in October should help the Federal Reserve bolster its case for another rate hike in December, but it wasn’t the only piece of news that pleased economists. Close observers also noted the strong income gains for private sector workers. (Source: “U.S. Adds 161,000 Jobs in October; Jobless Rate Ticks Down to 4.9%,” The Wall Street Journal, November 4, 2016.)
The data showed a 2.8% rise in average hourly pay from the same period last year, making it the single biggest increase since June 2009. Economists saw the gains as an indication that labor market conditions are tightening, particularly when paired with the rise in employment.
The headline rate for unemployment dropped to 4.9%, but some critics argue it is not an accurate picture of the country’s labor market. Workers who are involuntarily part-time or discouraged are not included in the headline figure, meaning it isn’t a complete visual.
But even critics’ preferred metric, the broader “U6” definition of unemployment, showed a downtick in October. It moved to 9.5% from 9.7% in September.
As such, the overall picture of job growth is good. Markets are taking the new data as confirmation of a looming interest rate hike, as is evidenced by a 76% probability of higher rates come December. The numbers are available on the CME Group Inc’s (NASDAQ:CME) FedWatch tool.
These advances in income match data recorded in this year’s U.S. Census, which showed a resurgence in wage growth at the median and lower levels. Considering that wages were stagnant for two decades preceding that report, the uptick shows structural change in the labor market. It suggests that the market is correcting for earlier deficiencies.
Meanwhile, recent Fed statements are unambiguous on this score. “For me, there is a relatively high bar at least in pure economic terms, a relatively high bar to not moving in December,” Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters on Friday in Orlando. But, mentioning the election, he said, “there are other things that go on in the world that can give pause, and I don’t completely rule those out.” (Source: “Lockhart says bar now high for Fed to not move in December,” Reuters, November 4, 2016.)
So, according to Lockhart, improving labor market conditions are likely to lead to an interest rate hike in December, barring an unexpected outcome to the November 8 election.