Mon Jan 12, 2015

US nonfarm payrolls increased by 252k, above market expectation and with an upward revision to the prior two months of 50K. It makes averaged job growth to a solid 246K and a total of 2.95 million jobs in 2014, the most in 15 years. The household survey showed that the unemployment rate declined to 5.6% from 5.8% in December, the lowest since June 2008. It was attributable to both stronger job gains and a decline in labor force participation which was down to 62.7% from 62.9%. While job market continues to improve, wage gains have lagged behind. US average hourly earnings declined by 0.2%, the biggest since comparable records began in 2006. Moreover, the gains seen in November were revised down from +0.4% to +0.2%. This was a bit surprising, given the recent upward trend in employment growth. According to Nomura’s research, one possible explanation for the decline could be compositional effects, i.e., recent hires are younger, less experienced workers who are accepting lower wages than the average. BoA Merrill Lynch think that there are a number of theories for persistently low wages. First, and most relevant, is that there is still slack in the labor market. Although the unemployment rate has tumbled, it has not returned to full employment and there is still underutilization in the labor market. Second, it is possible that there is pent-up wage deflation. Since employers did not cut wages during the recession, they do not have to increase wages as quickly. This suggests a greater lag between hitting full employment and wage inflation. Third, there is a composition shift where hiring has shifted to the lower paid jobs, which depresses the aggregate. Anyway, the drop in workers’ hourly wages means the Fed policy makers are less likely to move up the timing of an interest-rate hike.

Earnings season is kicking off this week. Concern grew that cuts in capital spending amid lower oil prices will hurt corporate earnings. There has been a decrease in the earnings growth for the S&P 500 since the start of the quarter. According to Thomson Reuters I/B/E/S research, fourth quarter earnings are expected to grow 4.0% over Q4 2013, compared to 11.2% estimated in the early October. Nine of the ten sectors have experienced downward revisions to estimates except for Utilities.