Schroders: US economy motors into 2015

Figures for October and November were revised up and for the year as a whole the US added 2.95 million jobs.

The gains in payrolls were slightly ahead of expectations as was the drop in the unemployment rate to 5.6%. Some will dismiss the latter as it partly reflects a fall in the participation rate to 62.7%, levels not seen since the late 1970s. However, as regular readers of our reports will know, we see this as a structural trend, which has been in place since 2008 and reflects the ageing of the US workforce, rather than a sign of weakness as workers become discouraged and give up searching. We are unlikely to see a change in this trend in the near future, with the result that the unemployment rate is likely to fall further in the coming months and end the year below 5%.

The crumb of comfort for the doves in this month’s report was the weakness of wage growth, with average hourly earnings actually falling by 0.2% and decelerating to 1.7% year-on-year. Tepid wage growth remains a puzzle as a tighter labour market should be causing pay to accelerate. Recent research from the San Francisco Federal Reserve suggests that there has been a delayed reaction in pay growth as firms were unable to adjust wages as much as they would have wished to during the downturn due to nominal wage rigidity. Nonetheless, one would expect this period to eventually come to an end: if growth remains solid and the unemployment rate continues to fall, wages will pick up.  And growth is solid: total hours worked in the economy, often seen as an indicator of real GDP, rose at an annualised 3.5% in the fourth quarter. 

The Federal Reserve will continue to balance low inflation and a weak external environment against the strength of the domestic economy. However, given the added stimulus which will come from the latest fall in oil prices and mortgage rates (now back to May 2013 levels, pre-taper tantrum) we are sticking with our view that they start to move in June and begin the process of normalising interest rates.