November Jobs Report Final Piece in Rate-Hike Puzzle

By Economic IndicatorsFOXBusiness

The November jobs report will serve as one of the last pieces of an elaborate puzzle the Federal Reserve has been piecing together for months. When that puzzle is completed, the Fed will raise interest rates for the first time in nearly a decade.

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If, as expected, the November report, due out Friday, shows another healthy month of job and wage growth, the Fed will almost certainly raise rates later this month.

“The Fed only needs one average report to finally raise interest rates on December 16 after seven full years of near zero,” David Kelly, chief global strategist at J.P. Morgan Funds, said.

Analysts are predicting the U.S. added 200,000 new jobs last month and that the unemployment rate remained unchanged at 5%, the lowest level since April 2008.

Fed officials – and everyone else – will be closely watching to see if wages continued to show growth momentum after a solid increase in October. Average hourly wages rose 2.5% year-over-year in October, the largest percentage gain in six years.

Strong wage growth that helps push inflation higher is widely seen as essential to the Fed’s decision to raise rates.

Stagnant Wages

“We'll also be looking for stronger wage growth as proof of an improved economy,” Tara Sinclair, chief economist at job site Indeed, said. “After years of stagnant wage growth, we finally saw the increase we were looking for in last month’s numbers. But that is only one month of data and these numbers can be volatile.”

Sinclair said she measures employer demand using job postings on Indeed.

“Because we see that demand continuing to grow, we expect wages to increase as well,” she said.

Wages have been essentially stagnant since 2009, a puzzling anomaly given the strong job creation and sharp drop in the headline unemployment rate in recent months. Historically, when the labor market tightens, the increased demand for workers pushes wages higher, which in turn lifts inflation. But that hasn’t been the case during the slow, grinding recovery from the 2008 financial crisis and deep recession that followed.

Earlier this year the Fed established two conditions for raising rates: “further improvement” in labor markets, and “reasonable confidence” that inflation is moving higher toward the Fed’s 2% target.

The October report undoubtedly went a long way toward convincing members of the policy-setting Federal Open Markets Committee that the conditions have been achieved.

Atlanta Fed President Dennis Lockhart said Wednesday, “In my opinion, the Committee’s criterion of ‘further improvement in labor markets’ has been met. And further ‘further improvement’ is certainly attainable.”

Cautious Fed

Meanwhile, Fed Chair Janet Yellen reiterated Wednesday her oft-stated position that the tightening labor market will eventually push inflation higher toward the Fed’s 2% target.

When rates do move higher it will be more expensive for consumers and businesses to borrow money. The higher costs for borrowing could cut back on consumer spending and business expansion, which could negatively impact labor markets. For those reasons, the Fed has been cautious, to say the least, in its approach toward raising rates.

The labor force participation rate, a key gauge of the percentage of working-age Americans currently employed, will also come under close scrutiny Friday as analysts try to determine whether large numbers of workers are still leaving the workforce each month either due to retirement or out of frustration in finding a decent job.

“We’re watching for an increase in the labor force participation both to understand how much (job) growth is really needed as well as how much growth is possible—if more people don’t come back into the labor force then employers may have a more difficult time filling their positions,” said Indeed’s Sinclair.

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