U.S. Jobs Report Suggests Interest-Rate Hike but Also Wage Growth

Executive Summary:

• One of the most closely watched economic indicators released by the U.S. Department of Labor this morning indicated that jobs grew by 178,000 in November from the month before. The increase was higher than expected and confirms that job market growth remains strong.
• Overall, the U.S. has had one of the longest streaks of overall employment growth on record, with businesses adding 15.7 million jobs since February 2010.
• In addition, the national unemployment rate declined to 4.6 percent from 4.9 percent in October. However, the drop was led by 400,000 people leaving the workforce.
• The drop in labor participation is mostly due to large groups of baby boomers retiring and exiting the workforce.
• Nevertheless, strong job growth and falling unemployment provide support for the Federal Reserve to increase interest rates in December, though Federal Open Market Committee members have suggested lately that strong economic data has already given them enough reason to move forward.
• Despite this month’s setback in hourly wage growth, wages are up 2.5 percent from last year, which has helped spur the strong consumer spending that we have seen in 2016. The monthly hourly wages data, however, is very noisy, and the drop comes after a large October spike due to more overtime hours following September’s hurricane activity.
• The strongest gains in wages were in the leisure and hospitality, information, and construction sectors, the industries that have been growing solidly in California. With the labor market continuing to tighten and rising inflation expectations, further wage growth is anticipated.
• For the housing market, the job growth among young adults ages 20 to 34 is favorable and has outpaced all other age groups this year. This will continue to fuel household formation going forward. And while wage growth has been slower among young adults, a continued increase in the number of these workers who are trading up for higher-paying jobs suggests that wage increases are forthcoming, especially since young adults will be replacing retiring baby boomers.
• Job growth in the construction sector — particularly residential — remains among the strongest of any industry, with a 3.5 percent increase over the last year. The largest growth in construction employment was among home-improvement remodelers.
• Lastly, tech employment grew for the fifth consecutive month, adding 5,400 new jobs. So far this year, the IT sector has created 79,500 new jobs. IT occupations in other industries have grown by 114,000, for a total of about 200,000 tech jobs created in 2016. With the unemployment rate among IT professionals remaining among the lowest of any occupation, at 2.9 percent, the pressure on wages will continue. Demand for professionals with security, the Internet of Things, and cloud-computing skills has been increasing.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

Article and images sourced from http://blog.pacificunion.com/u-s-jobs-report-suggests-interest-rate-hike-but-also-wage-growth/

Yellen reiterates rates likely to increase this year

Will the Fed finally begin normalizing monetary policy? 

 

 

Federal Reserve Chair Janet Yellen reaffirmed in a speech to The City Club of Cleveland that she still expects it will be appropriate later this year to take the first step to raise the federal funds rate and begin normalizing monetary policy.

“My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting,” Yellen said.
“But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step,” she added.
Back in May, Yellen said in a speech at the Providence Chamber of Commerce in Providence, Rhode Island, that the Fed is seeing widespread economic improvement and expects that improvement to continue. And if the economy improves as expected, she believes it will be “appropriate” for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.
Although Yellen noted that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years, there are still a couple factors that could restrain economic growth.

1. First, business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.
2. A second factor that could restrain economic growth regards housing. While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft. Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing.

So what’s the current status of the Fed?

Looking at the latest minutes from the June meeting of the Federal Open Market Committee, nearly all the committee members and the Federal Reserve are still hesitant to increase the federal funds rate.

Despite signs of economic progress, only one of the 10 FOMC members was ready to increase the federal funds rate during the June meeting.
“The committee concluded that, although it had seen some progress, the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase,” the FOMC minutes stated.

Article and image sourced from http://www.housingwire.com/articles/34444-yellen-reiterates-rates-likely-to-increase-this-year