The US economy created 252,000 jobs in December, higher than the 220,000 that IHS Inc projected, said Nariman Behravesh, chief economist at IHS Inc. The November nonfarm payroll number was so high – which seemed fluky – that most economists thought there would be a pullback.
The higher numbers indicate the recovery will continue to be solid going into 2015. That said, the decline in wage numbers is troubling; more importantly the drop in unemployment rate to 5.6 percent from 5.8 percent was almost entirely due to a 273,000 drop in the labor force, which is not good news. The Fed could delay its rate-hike decision due to the drop in labor force participation rate, he noted.
Asked if the US economy is witnessing a new paradigm where the labor market continues to improve but labor force participation rate declines or stays at low levels, Nariman answered in affirmative. Some of the recent labor-market trends could be structural with demographics playing a role in it.
The US surely can’t go back to the labor force participation rate of the 1990s or early 2000s. But the continued drop, especially in the monthly labor force numbers, is more cyclical in nature and doesn’t signify a new era or a paradigm shift. It’s likely many workers are not totally confident that this recovery is for real and they are not re-entering the labor market, he explained.
The December nonfarm payroll report shows a 0.2 percent decline in hourly wages, which seems unnatural. Asked if it was a fluke, Nariman said the monthly readings tend to bounce around a lot. The 0.4 percent wage-growth in November was a fluke and the December’s minus 0.2 percent reading is probably a fluke as well. The US economy is probably averaging around 0.2 percent (positive), which is still very weak. That means there’s still a lot of slack in the labor market, he observed.
Asked what the excess slack could possibly mean for the Fed, Nariman said it means the Fed needs to be “patient.” The Fed needs to wait for the next few months, and contrary to markets’ expectation for a rate-hike in June, they may actually wait till fall before making the move on rates, he argued.
Asked if the Fed should look at other pointers apart from labor-market data before taking a call, Nariman answered in affirmative. The Fed should also look at capacity-utilization; if the economy is reaching its capacity limits, it will tend to push inflation up. The Fed is most likely looking at other indicators as well, he noted.
The latest FOMC minutes show the Fed is observing keenly what’s going on overseas; for instance the developments in Greece and the crisis situation in Europe. Asked if it was unusual for other Fed to show concern about other central banks, Nariman said the Fed is clearly worried about what’s going on outside of the US.
Growth is very weak in Europe and Japan, and China is showing signs of slowdown as well. There’s a lot of turmoil going on in other parts of the world including emerging markets, and the Fed is clearly very concerned about the developments abroad. However, so far the US economy has managed to rise above the global funk and has managed to shrug-off the bad news. How long the US economy can manage to keep doing that remains to be seen, nevertheless, he explained.
The recent plunge in crude oil prices and its effect has been widely discussed across the world. Asked if declining oil prices will impact the US jobs market, Nariman said plunging oil prices are likely to boost US growth by about 0.5 percent. However, there are both positives and negatives and oil-sector jobs are already being shed in Texas and North Dakota. Alternately, sectors such as airlines, trucking, consumer goods etc. are witnessing big, big job gains and that’s good news, he concluded.
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