On non-farm payrolls day, pay attention to pay

September 2, 2015

A pedestrian passes a pawnbroker offering 'payday advances' in Crawley, southern EnglandA lot is riding on the August U.S. jobs report – a good chunk of justification for the first Federal Reserve interest rate rise in nearly a decade and a lot of face-saving at the world’s most powerful central bank.

The Fed already has postponed what were clear intentions to raise rates by mid-year and some are now saying with financial markets in a renewed period of turmoil and volatility, the window of opportunity for lift-off is narrowing.

The problem is there isn’t a lot of optimism to go around at the moment, and the global backdrop has darkened considerably over the last few months.

Nearly everyone, wrongly, will focus on the payrolls figure, which could be anywhere from 170,000 to 265,000 jobs, according to the range of 103 estimates in the latest Reuters poll. The median forecast is 220,000 – a decent amount of monthly jobs growth that probably wouldn’t sway the Fed one way or another. But as we know, the payrolls data rarely do that, mostly because the margin of error for the BLS change in payrolls — around +/-100,000 — is almost always much higher than whatever “miss” versus the consensus forecast.

A quick scan of the top 10 most accurate forecasters in recent surveys suggests no big surprises are in store. That said, an equally quick scan of payroll results over the past year also suggests there is good reason to believe that jobs growth will continue to slow. Payroll growth was 329,000 last December after revisions, carving a recent trough of 126,000 in March but rose a relatively-modest 215,000 in July.

Much more important are the wage numbers. The one thing that has central bankers around the world scratching their heads most — apart from the overall lack of inflation to be found anywhere even after the most aggressive monetary easing in history – is the lack of wage inflation even as unemployment gets down to the kind of level where economic theory dictates a lot more ought to be generated.

While the consensus is for a tame 0.2 percent monthly rise in average earnings, there are only two of the top 10 forecasters calling for that outcome. The remaining eight are forecasting either 0.3 percent or 0.4 percent.

That may not seem like much, but this is a central bank looking for a sign – any sign – that their expectation inflation will become enough of a problem in coming months to warrant lifting interest rates off of emergency levels. With unit labour costs revised down to a 1.4 percent fall in the second quarter – even while the economy was growing at an annualized 3.7 percent rate – that wage figure will almost certainly need to be higher than expected to give the Fed any kind of nudge.

The spanner in the forecast data, however, is that among those most accurate on wages who are also more optimistic about a pickup, most do not expect any acceleration in payroll gains and the rest are relatively pessimistic.

We will never be certain what the U.S. Federal Open Market Committee will do at the conclusion of its meeting this month on Sept 17 until it concludes and they tell us. Similarly, no one economic indicator ever dictates the course of policy.

But at the same time, no other major central bank has full employment as part of its official mandate, along with inflation. And based on what Fed officials have to say about it, what we do know for sure is that they have a very strong inclination to get on with the job.

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