US jobs numbers are due – but what’s the downside to full employment
- Non-farm payroll numbers are due to be released before US markets open on Friday.
- The strong jobs market is seen as a success story, and the US Fed is as close as it can practically be to meeting its aim of ensuring full employment.
- The industrial action taken by 46,000 GM workers in October is a notable statistic in the figures and means that there will be some accounting adjustments to the November numbers.
- The GM strike is more than a lesson in accounting protocol. It sticks out because it shows that despite ‘good’ jobs numbers, there are underlying problems brewing in the economy.
The non-farm payroll (NFP) numbers, which show the number of jobs added by the private and state sector, form a significant milestone in the economic calendar. The numbers that are released on the first Friday of each month will be eagerly anticipated by the financial markets, least of all because they will likely bring about some immediate whipsawing of price action, and stop loss levels will have to be managed accordingly. Once given proper consideration, the data will give those same markets, equities, forex, bonds and commodities an indication of which direction they could be heading.
Employment/unemployment levels provide a yardstick by which investors can measure the health of the US economy. An added dimension is that the US Federal Reserve has repeatedly stated that it is the jobs numbers that are going to determine the Fed’s interest rate policy – US interest rates, in turn, being a major determinant of the growth levels in the global economy.
The numbers released on Friday will report the Bureau of Labor’s data for November. Those doing some prep by looking through the October report will see repeated references to industrial action taken by 46,000 GM workers in that month. What starts out as an accounting adjustment – ‘are they working/are they not?’ – is actually an indication of how full employment might turn out to be a drag on the economy as workers take the opportunity to flex their bargaining rights.
The NFP numbers for October omitted these 46,000 workers from the data, and so manufacturing employment fell by the most in a decade but will rebound now that the strike has been called off. The rest of the October report had a positive tone. NFP rose by 128,000, beating market expectations of 89,000, and September’s number was revised upwards.
Job gains occurred in food services and drinking places, social assistance, and financial activities. Even making adjustment for the GM strike, the gains were in the service sector – not manufacturing.
Squaring the circle
The GM story highlights the quandary facing the Fed. It has met its target of ensuring near full employment, but that might open the door to wage-driven inflation. At the same time, manufacturing in high-wage countries is struggling to compete on a global scale, so any lack of competitiveness is likely to rebound back onto US firms and workers.
The GM situation is reflected across the whole US manufacturing sector. GM claims that its US-based full-time workers are paid an equivalent of $33 per hour. Although the exact number is disputed because it makes assumptions relating to overtime and profit-sharing schemes, the headline figure stands out compared to the average for Mexican autoworkers, who earn $2.70 per hour on average. In the US, temporary employees earn about $15 an hour.
Source: Detroit Free Press
On the other hand, the wages paid to the employees at GM do not to them appear to be ‘high’ at all. QZ.com reports that the GM strike came about because of “wages, which have been barely risen since 2010 and have actually fallen when adjusted for inflation.”
Harley Shaiken, a University of California, Berkeley professor and national expert on labour, was speaking to the Detroit Free Presswhen he said:
“The GM strike has become a symbol of the big picture. That’s why there has been such unusual fervent support for those on the picket line … You could summarize a pervasive concern of working Americans and a theme running through the strike with a single word: uncertainty … This goes way beyond GM.”
Source: Detroit Free Press
Neither employer nor employee appear particularly pleased with the current situation. The UAW will now move on to negotiate contract terms with Ford and Fiat Chrysler. Using the GM terms as a benchmark brings about the risk of another strike as it’s unlikely that Ford or Fiat Chrysler will like the terms of the GM contract.
As analysts turn to Friday’s NFP announcement, they will be tasked with trying to ascertain if the threat of wage-push inflation is really upon us. The US Fed will meet soon afterwards on 10th-11th December.
The rate decision and guidance given by the Fed will offer an insight into its assessment of wage-driven inflation risk. The Fed itself states its mandate to be:
“The objectives as mandated by the Congress in the Federal Reserve Act are promoting (1) maximum employment, which means all Americans that want to work are gainfully employed, and (2) stable prices for the goods and services we all purchase.”
Despite a decade of increased financial liquidity, the global economy shows little sign of suffering from runaway inflation, and the Eurozone and Japan are actually struggling with issues relating to deflation. Not only is US CPI inflation printing at levels under 2%, but it is also stable, the 12-month data range being between 1.5% and 2.0%.
US Inflation Rate
US Job Vacancies
Therefore, the full employment target has become the focus of the Fed’s attention. The number of vacancies has been stable, representing churn in the labour market. The NFP shows that the trend of low volatility also applies to new jobs.
The situation may be stable, but it is far from ideal.