Key US employment data came out last Friday and it was much stronger than expected. It continues a trend of impressive payrolls numbers and believe this is the extremely positive for both the US and global economy.
The Facts
- US employment for December +292k vs median forecast +200k
- Unemployment rate 5.0% for December vs median forecast 5.0%
- Average hourly earnings growth was flat for December vs. median forecast +0.2%
- Over the past three months, job gains have averaged 284,000 a month
- The US economy added 2.65m jobs in 2015
Why is it positive?
The fact that almost 300,000 jobs were added in the US in December indicates that the economy is growing at a solid pace. With more people employed, there is more money in the economy that can be spent – this drives economic activity and spurs further growth.
Not only did the job creation in December surpass expectations, but the jobs figures from the previous two months were revised up significantly. November figures were revised from 211,000 to 252,000 and October’s from 298,000 to 307,000. Over the past three months, job gains have averaged 284,000 a month. The US economy added 2.65m jobs in 2015. Last year trails only 2014 as the best year for job creation since 1999.
What were the negatives?
Wages seem to be struggling to rise. Average hourly earnings slipped by a penny in December from November, signalling continued slack in the labour market.
Basically, although a lot more people are being employed, there are still plenty of people wanting jobs. This is removing demand pressure for labour and means wages are not rising. Low wage growth corresponds to lower inflation which is a key measure the US Federal Reserve is watching when assessing whether to raise interest rates.
Also, weather may have artificially boosted the employment numbers. The unseasonably warmer weather experienced in December lead to increased employment in construction and manufacturing. These gains may reverse in coming months.
What does it all mean?
The job gains and stable unemployment are massive positives for the economy as it indicates it is able to handle the interest rate hikes from the Fed. Last month, the Fed raised interest rates for the first time since June 2006 and is expected to raise them again this year. This suggest the economic recovery is self-sustaining and is exactly what the Fed want to observe.
believe that although the US Federal Reserve should be pleased with Friday’s job report, they will be slow and cautious on any further increases in their benchmark interest rate.
When making the decision to raise interest rates, the Fed is likely to look at the overall state of the US economy. And while the US labour market may have had a strong finish to the year, there are a number of concerns that they will be watching (low inflation, China and tension in the Middle East).
We believe that although China may be experiencing some economic headwinds, the world’s largest economy appears to be doing reasonably well. Investors should take a balanced approach when assessing the tone and the strength of the global economic environment. Scare mongers will have you believe the world is ending, but when assess the facts there are a multitude of positives that also must be considered.
’s portfolios have been constructed to account for both sides of the coin. We are aware of the downside and have attempted to take measures to protect our investments. Conversely, we hold a number of solid companies that are benefit from core underlying themes. We see the events in China as more of a transition stage (from manufacturing to a consumer driven economy) rather than an all-out collapse.
Hence, despite the volatility recently experienced in markets our portfolio has continued to perform. Our core themes are benefiting from the transition rather than being hindered by the change. What it illustrates is, that if investors are savvy they can make money even when others are panicking.
