multi-asset
Is US job creation as strong as it looks?
The latest US inflation report showed signs of inflation falling at a slower pace than expected. Inflation data have disappointed twice in a row and are seemingly consistent with firm US employment and wage growth. In this weekly edition of Simply put, we consider what constitutes a strong employment report and how expectations are coloured by what many market participants consider to be normal.
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Need to know:
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How many new jobs is too much?
While the first wave of high inflation seems to be well and truly behind us, future inflation is likely to be driven less by a negative supply shock than by a positive demand shock. The issue for the employment market could well become the key to 2024 for the financial markets: if job creation is too strong – for instance the US economy produces too many new jobs each month – wages will continue to rise, supporting demand. Sooner or later, this demand will contribute to the persistence of undesirable inflation, further delaying the first rate cuts by the Federal Reserve (Fed) and the European Central Bank (ECB) by contagion. This is a significant issue, because the longer these rate cuts are delayed, the greater the likelihood of a hard landing.
Thus our macro question of the day is: is the economy creating too many jobs and are normalised market expectations off the mark?
200k per month
Portfolio managers and economists who began their careers in the early 2000s have an average level of job creation in mind for the US Nonfarm Payrolls, a mental benchmark. This so-called normal level is around 200,000 new jobs per month – many remember waiting for these figures in front of their Bloomberg screens, even developing strategies to position for the event.
All of this belongs to the pre-'HFT1' era, and while opportunistic positioning persists, it is no longer as commonplace. What remains is the psychological anchoring around the 200 k level: a figure above is good news for the economy and bad news for inflation in the collective subconscious of many managers.
Figure 1 shows the evolution of the average number of jobs created per decade: from 2000 to 2020 the 200 k level became the norm. From this point of view, recent job creation cannot fail to arouse some nervousness among investors: with 353 k jobs created in January 2024, the employment report is 75% higher than its benchmark.
Worse still, considering the evolution of this average by decade, three key periods stand out: 1980-2000 with 260 k jobs created on average; 2000-2020 with a lower average; and, above all, the recent period since 2020 with an even higher average: 290 k! The US economy is therefore creating more jobs on average than the generation currently managing portfolios has been used to. Job creation is also firmer than what the previous generation of managers was familiar with.
If the US economy has never created so many jobs, in terms of both level and average, how can we expect inflation to ease and the Fed to cut rates?
Figure 1: Average number of jobs created in the US per decade.
Source: Bloomberg, LOIM. As at February 2024.
Demographia ex machina
While these previous figures may seem alarming for dovish participants, they should be taken in the context of demographics. We can assume that the rate of US job growth represents a percentage of the working population, which in turn represents a percentage of the total population. In other words, adding 200 k per month to a total population of 300 million, as was the case between 2000 and 2010, does not have the same consequences as adding the same number to a population of 335 mn.
Figure 2 looks at the proportionate effect: the left side shows the number of jobs created per decade, revealing the apparent abnormally high readings recently. The right side shows job creation as a percentage of the country's working population. Between 1980 and 1990, the 260 k average number of jobs created represented 0.17% of the US population, a high figure when compared with subsequent decades, including the period since 2020.
The mentality prevailing since the 2000s corresponds to very low levels of job creation: less than 0.10% of the population per month. The average since 2020 has been somewhere between the two figures, at 0.13% of the population. Participation in the labour market could distort these figures slightly, but it has only fluctuated between 62% and 67%, not contradicting the message in these charts.
Yes, the US labour market is currently in good shape, but the 200 k anchor is perhaps a poor benchmark: 270-300 k could be the current cruising speed without raising the spectre of runaway inflation.
Figure 2: Average US job creation by number and as a ratio of the working population
Source: Bloomberg, LOIM. As at February 2024.
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Simply put, the US labour market is currently growing at a less inflationary pace than might appear at first sight. |
1 HFT stands for high-frequency trading.
Nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasting indicators currently show:
- Our growth indicator increased over the week, driven by marginally better US and Chinese data
- Our inflation signal declined this week, mainly from marginally retreating US data
- Monetary policy-related data continue highlighting a shift in central bank policy, from hawkish to dovish
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).
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