U.S. Labor Market Looks Impressive

September 6, 2015

US Non Farm Payrolls, released on Friday, were once again close to 200K and even though, the figure came in below expectations (215K), 173 000 new jobs per month is still a superb result. On top of that, the unemployment rate edged down to 5.1 percent and most importantly, hourly earnings also increased by 0.3 percent. If you combine these three sets of data, then it is easy to arrive to a simple conclusion ,that the US labor market is more than ready for a rate hike in September.

It would be extremely difficult for the FED to delay the first rate hike saying that the labor market is not strong enough and there’s still room for improvements. The unemployment rate is very close to the 2007 lows, which were around 4.5 to 4.9 percent and if the decline continues, then I would not be suprised to see the unemployement rate dropping below 4 percent or in other words, to the levels before the Dotcom crash in 2001. Of course, there is always room for further improvements but in the real world we’ll never reach the absolute ideal figure, which in this case would be 0.0 percent and hence I’d say that when the unemployment rate is getting close to 5.0 percent, we have reached the perfect conditions.

Before the Dotcom Bubble, the unemployment rate was around 4 percent and back then, the Federal Funds Rate was at 6.5 percent. After more than 8 years of ZIRP, it is quite hard to even imagine such a figure but it does not change the fact that once, not that long ago, it was perfectly normal. Moving forward in time, in 2003 the unemployement rate spiked to 6.4 percent, which marked the top for almost 5 years. Back then, the Federal Funds Rate was at 1.0 percent – still considerably higher than it is today – and finally 2006-2007, when the unemployment rate was between 4.5 and 5.0 percent, the Federal Funds Rate was at 5.25 percent.

In conclusion – it is more than clear, that the US labor market is ready for a tiny 0.25 percent rate hike in September.

Capital Properties FX
06.08.2015
Kaarel.