Last Friday saw another strong nonfarm payroll (NFP) number for the US economy, adding 255,000 jobs in July. This was well ahead of Bloomberg economists’ forecasts of 180,000.
The nonfarm payroll is a measure of employment and an important barometer for the US economy - its monthly release is a key date for economists and the media. Below we think about what the latest numbers mean for US growth and markets generally.
Why nonfarm payrolls (and not just payrolls)? The separation of nonfarm payrolls from total payrolls stems back to 1884 when the U.S Bureau of Labor Statistics began collecting data. At the time agriculture was the majority of employment and the relatively smaller 'nonfarm' payrolls were bundled together. The separation is also necessary to avoid the seasonal skew from agricultural, which hires heavily during harvesting seasons. This seasonal skew remains the reason why NFPs are separated from total payrolls for measuring the consistency of new jobs added.
Where are the new jobs coming from? Strong growth in professional business services, hospitality services, healthcare and education were the main catalysts in July’s strong number. This is the 2nd consecutive month of higher than expected NFPs (June was revised upwards from 287,000 to 292,000). There is now much less slack in the labour market with the number of available people per job opening now below 2006-2007 levels. Some economists believe the US economy is nearing full employment.
What does this mean for the US economy? Firstly, there is no sign of a slowdown in the US economy. This cheered equity markets with the S&P500 up 0.9% on the NFP announcement. Second, it is possible we could see positive signs for inflation. With tightening labour markets, some bargaining power shifts to potential employees. In a more competitive environment for skills they can demand a higher wage. This is supported by the fact the number of companies planning to increase worker compensation over the next nine months is back near pre-crisis levels. Upwards pressure on wages could drive higher consumer spending (a major factor in US GDP growth).
What does this mean for markets? In our view stronger than expected NFP growth means: (1) A higher US dollar. (2) A higher likelihood of another Fed rate rise by year end. (3) Possibly higher US equities (a rate rise should send equities lower, but textbook responses don't apply currently in markets. If rates are rising because of a strong US economy, this signals higher earnings growth which we believe will be positive for US equities).
What the NFP number also tells us is that the increasing likelihood of a US rate rise in late 2016 will put the US out of step with other major economies like the UK, Japan and Europe.
By Karl Geal-Otter