The US payrolls were the Star of the week. They increased by an unexpected 271,000 in October, above the most optimistic forecast. With an unemployment rate down to 5% the year-on-year rate for average hourly earnings, at plus 2.5%, the strongest level since July 2009, investors at 75% are expecting a rate increase in December.
Indeed, payrolls in services surged 78,000 in the month with the subcomponent of temporary help services – considered a leading indicator for future hiring – up a very strong 25,000. Trade & transportation rose 51,000 while retail trade, which is gearing up for the holidays, rose 44,000. Construction spending was strong and payrolls show it, up 31,000 in the month.
However, few things are annoying me. First of all, the manufacturing sector, considered also as a leading economic sector is continuing to lose jobs. Manufacturing payrolls were unable to rise, unchanged in the month following two prior declines.
Secondly, we saw no change in the labor force participation rate at 62.4%. This indicator has been highlighted few times in the past by Janet Yellen to justify a non-increase in the rates. The divergence since 2009 between the GDP growth and the participation rate, -since EQ has been implemented -, is one of the fundamental anomalies, which worries me (Chart 1).
Chart1. US GDP Growth VS US Labor force participation
Historically, even if the manufacturing sector represents only about 10% of the US economy, it has often been a leading fundamental indicator. The current gap between the ISM non-manufacturing survey and the ISM manufacturing survey is the second anomalies, which should at least ring a bell (Chart 2).
The gap between the two surveys is 9 points, the widest differential since 2000. The dichotomy is explained by a dismal trade prospect, a first-half inventory overhang and a stronger dollar can explain the dichotomy. However, such divergences anticipated major corrections since 2000
Chart 2. ISM non-manufacturing survey minus ISM manufacturing survey
Regarding the full picture, the US economy does not look so good. Growth in the third quarter came up at 1.5% from 3.5% in the second quarter. Likely, the US economy will grow around 2.5% annualised growth in 2015, a miserable performance considering the monetary policy environment. Even the growth of the payrolls the last few months has been poor (chart 3). If at the beginning of the next month, payrolls would come below expectations of the current number revised down, investors could revise down their expectations to see interest rate rising at the next FOMC committee.
Chart 3. Nonfarm payrolls – Monthly and yearly changes
Subdued core inflation, commodity prices on a way to stabilisation, an economy showing some contradictory signals, why Yellen should increase interest rate in December? The international situation and the stabilisation of emergent markets could also pledge for a status quo in December. However, the main reasons remain the domestic issues and despite an optimism, the current fundamental situation cannot justify the US equity market trading at or close to their highest level.