The most important economic release of the month arrives later on this evening – US non-farm payrolls, or simply the US jobs report.
To say this is an important event is an understatement. With markets now favouring a rate hike from the US Federal Reserve in December – the first since 2006 if it actually arrives – many deem the October jobs report to be make-or-break in terms of whether rates will be increased.
While there are numerous parts of the report that markets will be looking at, when it comes to the crunch, it really comes down to three key factors.
Firstly, the unemployment rate, and what factors contribute to its movement (if any). Secondly, the level of payrolls growth and finally, the level of wage inflation.
Should the ducks line up – the unemployment rate drops or remains steady, payrolls growth rebounds and wage inflation accelerates, it’s almost certain that markets will begin pricing the likelihood that rates will be going up on December 16.
The three charts below show the recent trend in each if these key factors. Let’s start with the headline act, payrolls growth.
Payrolls growth in recent months has disappointed badly, leading some to determine that there was no possibility that the Fed would raise rates this year. In August and September payrolls increased by 136,000 and 142,000 respectively, the lowest two-month growth recorded since January 2014.
It has been overly soft by usual standards, and has seen the annual rate of payrolls growth slow too.
Over the past 12 months payrolls increased by 2.752 million. While still an impressive 230,000 average for each and every month, it marks the slowest annual increase since August last year.
With payrolls growth subdued, at least compared to recent standards, it’s time to look at trends in unemployment.
The US unemployment rate has been steadily falling since October 2009, when it briefly reached double figures at 10%. It now sits at 5.1%, at important level deemed to be a “natural” level of unemployment, or NAIRU.
NAIRU stands for the non-accelerating inflation rate of unemployment, and refers to a level of unemployment below which inflation rises. Essentially, when unemployment hits this level, or lower, labour market conditions become so tight that wage inflation follows.
The natural rate of unemployment in the US is thought to be 4.9% to 5.2%, so at 5.1% the unemployment rate is already there. Based on NAIRU, wage inflation should be accelerating.
As seen in the chart above, underemployment, simply the number of unemployed and underutilised persons in the workforce, has also been steadily decreasing. It was as high as 17.1% in early 2010, but now sits at just 10%, and is falling fast.
The reason the unemployment rates are falling are due to two factors: people exiting the labour market due to retirement and discouraged workers, those who can’t find suitable work simply not looking for a job. A combination of the two has seen the US labour market participation rate slide to just 62.4%, the lowest level seen since 1977.
With labour market conditions tightening, the final piece of the labour market jigsaw puzzle – wage inflation – is shown below.
Despite payrolls growth being firm and unemployment sitting at NAIRU, wage inflation remains subdued, as the chart above shows. Wages actually fell in September, leaving the annual increase at paltry 2.2%.
While partially in response to low inflationary pressures, annual wage inflation has been oscillating in a thin band between 1.8% to 2.3% since late 2012. It’s continued weakness has puzzled many, and likely contributed to the Fed leaving rates at 0-0.25% in recent years. Any signs of strength in this measure will really get the markets jumpy, as it’ll likely see the odds of a rate hike in December firm sharply.
With that information at hand, all that is left is for the data to be released.
Markets expect payrolls to increase by 180,000, with the unemployment rate tipped to remain at 5.1%. Average hourly earnings are forecast to rise 0.2%, leaving the annual rate unchanged at 2.2% if realised.
For those in Australia, the data hits at 12.30am AEDT Saturday morning.
As always, Business Insider will have full coverage as soon as the data drops.
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