Non-Farm Payrolls Surprise To The Upside

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Includes: DIA, IWM, QQQ, SPY
by: Invesco US

Summary

The work week increase during November, combined with increased jobs, drove an increase in aggregate hours, a strong outcome.

Going forward, there is potential upside to our growth forecast of 3% to 3.5%, especially if we continue to see improving data.

The Fed’s two mandates — full employment and inflation — goals appear to be at odds at the moment.

By Rob Waldner

Non-farm payrolls announced today rose a higher than expected 321,000 in November, representing the strongest month of hiring since January 2012.1 (Invesco Fixed Income expectations are for a solid trend rate of job growth of about 250,000 per month.) The work week also increased, rising by 0.3%. The work week increase combined with increased jobs drove a 0.6% increase in aggregate hours worked during November, a strong outcome.1

Payroll numbers point to solid growth

Today's strong labor data show broad strength in the economy and can be viewed as a key proxy for economic growth. We believe there is potential upside to our growth forecast of 3% to 3.5% going forward, especially if we continue to see improving data.

Unemployment expected to decline further

Although the unemployment rate remained unchanged at 5.8% in November, 1 we don't view this as significant. The unemployment rate depends on survey data of household employment, which tends to be volatile. Overall, unemployment has been trending down over the last several months, and we expect it to continue to decline.

Implications for inflation and the Fed still benign

While the labor data also pointed to relatively strong wage gains of 0.4% month-over-month,1 this increase only partially compensates for weaker numbers posted in the past few months. In our view, this means evidence of potential wage pressure - and therefore its impact on inflation - is still inconclusive.

The Federal Reserve (Fed) has two mandates: full employment and inflation. At the moment, these goals appear to be at odds. While the Fed is getting close to its mandate on full employment, in our view, it appears to be far from its other objective of inflation at 2%. The dilemma for the Fed will certainly intensify if wage growth takes off, but we don't believe we're there yet.

1 Source: US Department of Labor, Dec. 5, 2014

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