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Payrolls Light Green for the Fed Rate Increase

American firms continued their strong hiring in November which should leave the Fed little option but to cement its rhetoric with action and raise interest rates for the first time in almost a decade. 

Employers filled 211,000 new positions, more than forecast, following October’s 298,000 increase that was revised to the largest gain this year, according to the Employment Situation Report from the Labor Department on Friday. The unemployment rate held steady at 5.0 percent, a seven and a half year low. Economists had predicted 200,000 new jobs. 

Job creation has averaged 236,000 a month since the beginning of 2014. This dipped slightly to 210,000 this year but over the past three month it has picked up again to 218,000.

Any of these figures should be sufficient to warrant the beginning of the rate normalization process that the Fed has assiduously promoted over the past year,  at the October 16th FOMC meeting with the first Fed Funds increase since 2006.  

In October the central bank had declined to increase the Fed rate by 0.25 percent despite having raised market expectations that a hike was in serious consideration.

The global economic concerns that were cited, primarily China and Emerging Markets though without specific mention, in the September FOMC statement, and again referenced as being monitored in the October statement, have subsided in immediacy.

If the Fed does hike on December 16th, Chair yelled and others have said that the pace of future increase will be gradual and that it will probably be appropriate to keep monetary policy accommodative for a long time.

The central remaining consideration is inflation, or in the bank’s view, the lack thereof.

The U.S. inflation rate has been below the Fed's 2 percent target for more than three years. Though the Fed has repeatedly said that it expects the rate to return to its target over time, its projections have consistently overstated the actual pace of price changes.

The core PCE price index, the Fed's preferred inflation measure, dropped to 1.28 percent year over year in October, the latest reporting month, from 1.33 percent in September.  It has shown no tendency to increase since falling below 1.4 percent in December and has varied from a high of 1.35 percent in March to July's 1.25 percent low.

Energy prices, have been relatively stable since August, and though not directly factored into the core PCE figures, as the basic industrial commodity, they have a large effect on economy wide price levels. 

Aside from the payroll numbers, other aspects of the payroll report were less optimistic. 

Manufacturing employment declined 1,000 in November, it had been forecast to be flat.  Factory employment has had a difficult year, averaging just 2,000 a month, as the strong dollar has taken a toll on U.S. exports. In 2014 manufacturing payrolls gains averaged 18,000 a month. 

In a separate report, the Census Bureau reported that American exports slipped 1.4 percent in October and were down 6.9 percent on the year. They fell 4.2 percent in September. It was the 10th drop in a row for the annual figures and the largest. Imports fell 0.6 percent on the month and 5.2 percent on the year.  This was the seventh straight annual drop and the biggest this year. 

Average hourly earnings rose 0.2 percent in November as expected, down from October’s 0.4 percent increase.  Annually wages were 2.3 percent higher as forecast though this was down from October’s 2.5 percent gain. So far this year wages have increased an average of 2.2 percent annually, a bit more than half the pre-recession pace. 

Average weekly earnings declined slightly in November, just 2.0 percent higher on the year and matching the lowest for 2015, because, though hourly wages were up, average weekly hours declined to 34.5 from 34.6 in October. 

Construction hiring saw the biggest increase since January 2014 at 46,000 new jobs.  Retail firms added 31,000, health care, and leisure and hospitality companies also added jobs though at a reduced pace from October.

The so-called underemployment rate or U-6 rate, which is derived from the household survey and includes those working part time who would prefer full time work and all those who have looked for work in the past year, as opposed to the more widely cited U-3 rate which only counts those who have searched the in prior month, rose to 9.9 percent in November from 9.8 percent prior. 

The labor force participation rate climbed slightly to 62.5 percent in November from October’s 38 year low of 62.4 percent as a result of the number of people not in the labor force rising to 94.5 million from 94.4 million. 

The number of people employed part time for economic reasons that is who prefer but cannot find full time work, rose by 319,000 in November to 6.1 million.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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