How The U.S. Dollar Has Responded To Stabilizing Labor Market Conditions

Includes: UDN, UUP
by: Andrew Sachais


The U.S. dollar continues to rise.

Meanwhile, the labor market is showing steady growth.

As the labor market stabilizes, the Fed may be more likely to raise interest rates over the next year.

The dollar has risen as labor market conditions in the U.S. stabilized over the last few years. PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) is approaching five-year highs as employment indicators hold steady, hinting the Federal Reserve may begin raising benchmark rates over the next year.

The ADP employment report, usually a good indicator of what the non-farm payrolls figure will look like, showed respectable growth during the previous month. The ADP figure grew at a 2.07% annual pace for November, the seventh-straight month or 2% growth or more. After strongly contracting during the financial crisis, reaching lows of more than 5% contraction annually, the ADP figure has since steadied at pre-recession levels. Although economists are hoping ADP employment can accelerate at an even quicker pace in the future, steady growth is widely accepted.

Data provided by the Federal Reserve

Meanwhile, the initial claims figure continues to fall, but is gradually slowing its pace of decline. Initial claims spiked during the financial crisis, with annual growth reaching 56% in July 2009, as is seen in the chart below. After showing a strong post-crisis recovery, the initial claims figure has steadied at around 10% annual contraction. While, again, many would like the pace of initial claims to contract at a quicker rate, the steady pace of decline signals a firming labor market.

Data provided by the Federal Reserve

Lastly, the non-farm payrolls figure, like the ADP report, has recovered from its financial crisis lows, but now looks to have leveled off its pace of job increases. The annual pace of job additions for the payroll figure has been between 1-2% over the last five years, approaching pre-recession levels, as is seen in the chart below.

Collectively, the three labor market indicators tell a very similar story. Although labor conditions have firmed since the financial crisis, the recovery has yet to reach escape velocity. While the U.S. awaits escape velocity, the dollar continues to trend higher as its economy remains relatively better off than many developed countries across the world. While the economy is clearly not "overheating" just yet, higher interest rates may be warranted over the next year.

Data provided by the Federal Reserve

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.