Is a Strong Labor Market Enough for a 2016 Fed Rate Hike?

US domestic sales and labor market conditions

The following table depicts the US economy from the perspective of the labor market as well as domestic economic activity from June 2015 through January 2016.
Is a Strong Labor Market Enough for a 2016 Fed Rate Hike?

Looking at the condition of the labor market, we see that US consumption is affected by personal income and outlay, vehicle sales, consumer confidence, retail sales, and housing market activity. Non-farm payroll change and the unemployment rate also give us an idea of the labor market condition.

We can see in the table that personal income rose from June 2015 through November 2015 at an average rate of 0.4% except for the month of September when there was no rise in wages. In June 2015, rental incomes were on the rise, which prompted the increase in new home sales. The trend continued with the exception of September.

The consumer spending rate was in proportion with incomes. But in September and October, spending became soft and savings were solid. Vehicle sales were upbeat both for domestic and total sales during the period from July through November 2015. Sales were supported by strong consumer confidence during the period and low fuel costs since September.

However, domestic sales took a dip in the month of August 2015 when job openings fell, citing wage pressures. Non-farm payroll changed from 245,000 to 173,000 in August 2015. The unemployment rate declined from 5.3% in June to 5.0% in October, which points to strength in labor market conditions. The housing index remained strong from July to October and turned soft in November and December of 2015 and January of 2016, as income didn’t rise significantly.

Retail sector

In the retail sector, vehicle sales were strong from July through October 2015. They got a boost from low fuel costs. There was also a rise in restaurant sales, apparel sales, home furnishing sales, and durable goods. In September, however, retail sales were unchanged. In October, they didn’t spike much due to a turbulent US stock market in August and September and solid savings in October.

Despite the holiday shopping season in December, retail sales fell, especially auto sales. Revenues of companies belonging to the SPDR S&P 500 ETF (SPY) such as GAP (GPS), CarMax (KMX), AutoNation (AN), O’Reilly Automotive (ORLY), and Urban Outfitters (URBN) felt the impact.

Next, we’ll look at the US industrial scenario to find out what might hold back the Federal Reserve from raising rates in 2016.