Threading the monetary policy needle

At the risk of oversimplification, there are four main scenarios for U.S. employment growth in the months ahead:

  1. It continues to trend up by at least 200K per month—i.e., the latest slowing is essentially just noise.
  2. It moderates, but not nearly enough to stop the downtrend in the unemployment rate.
  3. It slows enough to stabilize unemployment immediately.
  4. It slows dramatically, and unemployment starts rising.

Our vote is “B,” in which case Fed officials will probably keep raising rates in 2019.

Payrolls rose 155K in November. Gains have averaged 170K over the last three months, not much different from 2017’s 182K average but down from 220K in the first eight months of the year.  However, the payrolls data are quite volatile, cautioning against extrapolating from monthly readings, or even readings averaged over several months. We have often made that point after weaker-than-expected data in recent years. Our next point has consistently been that slowing in the trend was not being corroborated by jobless claims.

Is this time different? Claims have risen a little in the past month, consistent with some genuine slowing. There have been signs of slowing in some of the growth data as well, most notably for housing and exports. However, employment growth needs to slow significantly—probably to less than 100K per month—to stop the downtrend in the unemployment rate.

And while the unemployment rate was flat at 3.7% in November, it was down a little again before rounding, to 3.67% from 3.74%. Moreover, it is already low enough to put upward pressure on wage gains. The 12-month change in average hourly earnings held at 3.1% in November, but that is a cycle high. The pace is up from 2.5% a year ago.

The backdrop for growth has become less favorable as foreign demand has decelerated and financial conditions have tightened a bit, but we don’t believe it has changed enough to stop the unemployment rate from trending down.

That said, there is enough uncertainty to make other scenarios quite plausible as well. Continued weakening in equities would be ominous, and momentum has been down…

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