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5 Feb 2016
US Payrolls forecast: Turbulence ahead – Deutsche Bank
Research Team at Deutsche Bank, suggests that one of the constants of the US post crisis recovery has been growth in nonfarm payrolls at a monthly average rate well over 200,000.
Key Quotes
“Nonfarm payrolls have expanded largely from reemploying the unemployed and transfers from non-payroll sectors. With five per cent unemployment this steady supply of surplus labour is running out.
We see this tailwind fading in 2016. Think of how weather changes from high to low pressure zones or when crossing a mountain range.
Employment gains must now rely on shiftier labour force growth
• Nonfarm payroll numbers will be increasingly dependent on growth in the labour force. This in turn is a function of younger workers (echo boomers) entering their peak years in the labour force, minus retiring baby boomers.
• We project that monthly average nonfarm payrolls could drop to 140,000 this year, and to 78,000 by 2020 solely due to these demographic trends, even if the US recovery remains on track.
• The tricky part is that the drop-in rate of echo boomers and dropout rate of baby boomers are winds that will not blow steadily – the behaviour of 55 to 64 year-olds in particular is key.
• The steady relationship between the labour market and the economy up until now will become less predictable, leading to much confusion.
Multi-asset investors can take advantage
• Investors should expect a gradually slowing trend in nonfarm payrolls and heightened labour market uncertainty and volatility. Be prepared for investment opportunities that arise when markets and policy makers overreact.
• Slower growth suggests a preference for higher quality and longer maturity bonds on the basis that longer term rates are less likely to rise on a sustained basis.
• On the plus side a tighter labour market could lead to higher wages and productivity, and some inflation. This may have implication for sectors exposed to capex spending.
• Emerging market countries with excess labour and manufacturing capabilities may also benefit.”
Key Quotes
“Nonfarm payrolls have expanded largely from reemploying the unemployed and transfers from non-payroll sectors. With five per cent unemployment this steady supply of surplus labour is running out.
We see this tailwind fading in 2016. Think of how weather changes from high to low pressure zones or when crossing a mountain range.
Employment gains must now rely on shiftier labour force growth
• Nonfarm payroll numbers will be increasingly dependent on growth in the labour force. This in turn is a function of younger workers (echo boomers) entering their peak years in the labour force, minus retiring baby boomers.
• We project that monthly average nonfarm payrolls could drop to 140,000 this year, and to 78,000 by 2020 solely due to these demographic trends, even if the US recovery remains on track.
• The tricky part is that the drop-in rate of echo boomers and dropout rate of baby boomers are winds that will not blow steadily – the behaviour of 55 to 64 year-olds in particular is key.
• The steady relationship between the labour market and the economy up until now will become less predictable, leading to much confusion.
Multi-asset investors can take advantage
• Investors should expect a gradually slowing trend in nonfarm payrolls and heightened labour market uncertainty and volatility. Be prepared for investment opportunities that arise when markets and policy makers overreact.
• Slower growth suggests a preference for higher quality and longer maturity bonds on the basis that longer term rates are less likely to rise on a sustained basis.
• On the plus side a tighter labour market could lead to higher wages and productivity, and some inflation. This may have implication for sectors exposed to capex spending.
• Emerging market countries with excess labour and manufacturing capabilities may also benefit.”