As the Federal Reserve (Fed) and Bank of Canada (BoC) policy rates approach neutral (the level at which monetary policy neither stimulates nor restricts growth), both central banks have emphasized future rate decisions will be guided by incoming data. Accordingly, investors trying to discern the path of monetary policy have become hyper-focused on economic data releases. One particular report that seems to attract outsized investor (and media) attention is the monthly release of the U.S. employment situation, which captures the change in total non-farm payrolls (NFP) and average hourly earnings.
Most recently, the November NFP lagged consensus at 155,000 and there were downward revisions to the prior two months’ numbers. The increase in average hourly earnings also came in slightly below expectations though it was still a healthy 3.1% annualized pace.
While the latest numbers disappointed expectations, we believe the moderation in job creation is part of a larger, more structural factor at play: demographics.
Taking a step back, the average number of new jobs added each month has hovered around an impressive 200,000, as the U.S. economy recovered from the depths of the credit crisis. These robust levels of job growth have driven the unemployment rate to an 18-year low of 3.7%.
As the U.S. economy hits late-cycle, NFP numbers will (and should) trend lower, guided by demographic trends. Projections by the Bureau of Labor Statistics (BLS) indicate U.S. population growth – and more importantly, labour force growth – will slow in the coming years, due to factors like declining fertility rates and aging baby boomers.
As for what the long-term figure is for monthly payrolls, it depends on a range of variables, though past statements from the Fed have indicated a sustainable level may be closer to 100,000 per month. Whatever that number may be, it’s clear investors will have to adjust expectations and recognize the larger economic forces at play.
In terms of policy implications, we believe these conditions point to a much more gradual pace of rate hikes by both the BoC and the Fed in 2019 than we saw in 2018. Despite historically low unemployment, inflation is well-contained and we see central banks pausing the hiking cycle to assess the effects of slowing economic momentum and tightening financial conditions.