The Fed will postpone lift-off until 1Q16

Nonfarm payrolls have deeply disappointed two months in a row. Private sector payrolls - always what matter - rose by only 100k and 118k in August and September, some 145k below what they averaged in 2014. Payrolls are volatile but there is more going on here. Job growth at goods producing industries (GPIs) has slumped since March and the drop accounts for about half the 145k shortfall in total (private) payrolls noted above. This likely owes to the 9% drop in goods exports since February. With goods exports equivalent to 10% of GDP, the drop in demand since February is significant. The drop in GPI payrolls since March seems likely to persist.

The other half of the fall in private payrolls in August and September owes to a broader drop in service sector payrolls. At 127k on average in Aug/Sep, service sector payrolls (priv) are running 75k below their 2014 averages. While this particular drop may simply be volatility, it will add considerable uncertainty to the on-going debate at the Fed about whether it's time to raise interest rates.

When combined with core capex orders, which haven't risen by a dollar in 3.5 years, and (especially) core PCE inflation, which has been falling for 3.5 years, the weakness in nonfarm payrolls forms a data package that will lead the Fed to postpone lift-off until 1Q16. Before yesterday, a December liftoff was expected. In addition, the Fed is more likely to deliver only two hikes in 2016, rather than 4 previously envisioned. The two hikes are pencilled into 1Q and 3Q of 2016. Plainly, two rate hikes in one year is less a 'well planned tightening strategy' than it is 'just a couple of hikes'. 

Given its druthers, the Fed would much prefer to be hiking on an every-other-meeting basis, or 4 times per year - such would be far more deliberate and predictable. The trouble is, even at this pace, you have to start hiking before you know it's truly time. There's no way around it - it's the nature of the beast. If you want to normalize slowly, you have to start when there will be much disagreement about whether or not the time has come. The data will be jumpy. Officials will be jumpy. Markets will be jumpy. It is these fits and starts - laid on top of an economy that may still have 2-4 more years of slack left in it - that will cause the Fed to move twice in 2016 instead of a more predictable / deliberate four times.