Employment Report On The Way

Quick post today as I am still settling back into the swing of things after some downtime during the holidays.

Friday morning the Bureau of Labor Statistics delivers us the employment numbers for December. Wall Street anticipates firms added 191k employees, a healthy pace of job growth, while the unemployment rate holds steady at 4.1 percent. The consensus is also looking for wage growth of 0.3 percent for the month, or 2.5 percent year-over-year.

Some thoughts on this forecast. First, the consensus job growth forecast looks reasonable and only somewhat below my forecast:Second, the unemployment rate may indeed hold steady, but note that the expected pace of job growth remains consistent with a pace that had driven unemployment lower in recent years. In other words, don’t take too much dovish comfort from a steady unemployment rate or even a slight uptick – the decline is coming. Indeed, this is how the Fed would likely view a combination of solid job growth and flat unemployment. From the December FOMC minutes:

Labor market conditions continued to strengthen in recent months, with the unemployment rate declining further and payroll gains well above a pace consistent with maintaining a stable unemployment rate over time.

I continue to believe that central bankers can make all the noise they want about. low inflation, but, when push comes to shove, they will maintain the gradual path of rate hikes as long as growth growth remains solidly above the roughly 100k needed to hold unemployment constant.

Third, tepid wage growth to date has reduced concerns that the labor market was past full employment, but has not reduced those concerns sufficiently for the Fed to back off rate hikes in 2017 or there 2018 projections. My expectation then is that continued soft wage growth won’t deter the Fed from continued rate hikes, but a more rapid acceleration in wage growth would easily help put a fourth rate hike in play for 2018.

Bottom Line: My expectation is that the employment report supports either stability of the Fed’s three rate hike forecast or raises the possibility of a fourth hike. I doubt that we will see a report with more dovish implications; even if the report is soft, the Fed would likely dismiss it as an anomaly given the solid pace of other data in recent weeks.