The health of the US labor market
The health of the US labor market is possibly the primary reason the FOMC (Federal Open Market Committee) had confidence to raise interest rates in December 2015, even in the face of subdued inflation. Inflation was being held down by depressed energy prices.
Since the US labor market was seeing a healthy addition of jobs, a rise in consumer spending seemed inevitable, leading to a rise in the general level of prices. The expectation was that the downward pressure exerted by crude oil prices would only impact in the near term, and so the Fed hiked the rate.
The primary indicator for the US labor market is the monthly non-farm payroll number, which is released along with the unemployment rate. According to the latest report, 242,000 jobs were added in February 2016, while the unemployment rate remained unchanged at 4.9% from a month ago. The number of additions for January was revised up from 151,000 to 172,000.
A look at the graph below will show you that job additions have been more than 200,000 a month in eight of the past 12 months. Mining remains an eyesore and has continued to lose jobs along with hurting companies such as Alcoa (AA), Nucor (NUE), and CONSOL Energy (CNX).
US labor market slack
Although job additions have been strong for the most part, there’s still a labor market slack. In her March 2016 opening remarks at the press conference, Fed chair Janet Yellen said that although the labor participation rate—a measure of labor market slack—has improved, there’s room for further improvement. She said that involuntary part-time employment, which measures the number of people who have part-time jobs but would like to work full-time and can’t, is still high. She added that wage growth “has yet to show a sustained pickup.”
A healthy wage growth is important for higher consumer spending, which, in turn, will benefit mutual funds. These funds include the Fidelity Blue Chip Growth Fund (FBGRX) and the Harbor Capital Appreciation Fund – Investor Class (HCAIX), which have more than a third of their assets invested in the consumer discretionary and consumer staples sectors combined. ETFs such as the Consumer Staples Select Sector SPDR ETF (XLP) and the SPDR S&P Retail ETF (XRT) also stand to benefit.
If consumer spending is able to help the economy sustain a stable growth rate, it would stoke inflation and lead to a rise in interest rates. However, coupled with the poor state of the global economy, further rate hikes could be delayed for the following reasons:
- labor market slack rises
- job additions slow considerably
- most importantly, wage growth stagnates
Since consumer spending is so important to the US economy, let’s look at that in the next part of this series.