November jobs report gives Yellen green light

Today's jobs report was the last key release ahead of the FOMC meeting on 15-16 December and should make the Fed feel comfortable about raising the Federal funds rate target for the first time since 2006.

The November jobs report was stronger than expected but in line with consensus. Overall, nonfarm payrolls increased by 211,000 in November (Forecast 175,000, consensus 200,000). The total revision of September and October was +35,000. The increase in employment was driven by the private sector as private employment grew by 197,000 in November.

Average hourly earnings declined from 2.5% in October to 2.3% in November in line with expectations. The annual growth rate in AHE is by nature volatile so the decline should, not be over-interpreted and it is worth noting that the trend has been upward this year. This is a sign that the Phillips curve is still functioning well.

"We expect wage growth to continue to trend up as we expect the labour market to tighten further. The UK experience is that wage growth can be subdued for a long time and suddenly increase very quickly. As we expect wage inflation to increase this implies that underlying inflation pressure in the US is also increasing. This is the main reason we look for four hikes in 2016", says Danske Bank.

The unemployment rate was unchanged at 5.0%. It is believed it will very soon fall below the low end of the Fed's projected NAIRU range (4.9%). The participation rate is expected to be fairly stable in coming years, labour force is expected to grow in the range 100,000-150,000 per month over the next few years. The labour market would tighten as long as employment growth exceeds this.

Nonfarm payrolls have increased 218,000 on average over the past three months and 210,000 on average so far in 2015, implying that employment growth would have to decline significantly from its current pace for the development in the labour market to become a concern for the Fed. Based on the expected growth in the labour force, trend employment growth would have to slow by more than 50,000 per month on average just to keep the unemployment rate unchanged at its current level. If it turns out that economists are too optimistic on the participation rate, employment growth would have to slow even further to keep the unemployment rate unchanged.

It is worth noting that manufacturing employment declined by only 1,000 in November, despite the very weak ISM manufacturing index. It is likely there is a lag between lower activity and employment but so far employment within manufacturing has not suffered significantly.

The number of marginally attached workers in November was the lowest since October 2008, indicating that the degree of slack in the labour market is diminishing quickly.