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Runway Clear For Fed Action


Image source: Unsplash.com

What's going on?

The unemployment rate in the US fell to its lowest level since 2007, but the details of the jobs report on Friday contained possible cause for concern.

What does this mean?

We have reported quite a bit this year on the improving US jobs market – and Friday’s report was another relatively strong one. Of course, that’s good because employed people tend to spend more money on things and, since consumer spending makes up about two-thirds of the US economy, that’s very important.

However, just focusing on the unemployment rate can be misleading because it doesn’t include unemployed people who have stopped looking for work. A wider measure of unemployment, which includes those who have stopped looking for work as well as those that are working part-time when they would rather be working full-time, still hasn’t recovered to the level that it was at prior to the financial crisis. On the bright side, even that measure of employment is improving.

Why should I care?

The bigger picture: Wages declined – but that could be a statistical blip.
Average hourly earnings supposedly decreased in November versus October. This could be a mistake in the data (which does happen from time to time), or it could be the start of a worrying trend (it’s more likely to be the former). If it turns out wages are declining, that would be a bad sign for the jobs market – and the wider economy.

For markets: The big question is what the US Federal Reserve (“the Fed”) will do with interest rates next year.
A stronger jobs market – and overall economy – makes it more likely that the Fed will raise its target interest rate (because a higher interest rate creates a headwind for the economy by making it more expensive to borrow, and thus spend, money – and therefore it only gets increased if the economy is improving). Recent data has made an interest rate increase at the Fed’s next meeting (on December 14th) a near-certainty. The big question for investors will be if, and how many times, the Fed raises interest rates next year (for a run-down of the effect of interest rates on investments, click here).

Originally posted as part of the Finimize daily email.

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