US: Expect employment growth to pick up again – Danske Bank

Research Team at Danske Bank, suggests that there was almost nothing good in the latest US jobs report for May and the jobs report for April was not strong either.

Key Quotes

“Employment rose only by 38,000, the lowest since 2010 (dragged down 35,000, however, by a Verizon strike). It is not easy to find good explanations for the weak reports. Two negative reports in a row could be a warning that the economy is slowing. The weak jobs reports could also be a result of the economic slowdown in Q4 15 and Q1 16 where employment growth was high despite weak GDP growth.

We cannot rule out that it is due to pure volatility either. It is not the first time that we have been negatively surprised by a weak jobs report one month and positively surprised over a strong one the next. Overall, and given other strong economic data, we do not think this is a sign of a significant slowdown in the US economy – at least, we need more data to support this.

We expect employment growth to pick up again although it will remain lower than in 2014 and 2015 as we are very close to full employment. We expect employment to rise around 175,000 per month in the coming years, which means we expect a pick-up in productivity growth to ensure growth around 2.0-2.5%. Employment growth of around 175,000 per month is enough to ensure that the unemployment rate will continue to decline as we do not expect to see a major pick-up in participation rates. We expect the unemployment rate to reach 4.4% by year-end next year.

The tighter labour market has already led to higher wage inflation although it continues to stay relatively moderate. As we expect the labour market to tighten further, we also expect increasing wage pressure, which should help push core inflation further up. We expect PCE core inflation to crawl slowly to 1.9% y/y over the forecast horizon. We also expect headline inflation to move up as the base effects from the oil price drop begin to fall out and as we expect food prices to rise at a higher pace.”