US labour market trends suggesting September rate hike

12th June 2015 by Simon Ward

US job openings (vacancies) surged in April, consistent with the forecast here of economic reacceleration from the spring, following a rebound in real narrow money growth in late 2014 / early 2015 – see previous post.

The job openings rate (i.e. vacancies expressed as a percentage of the total number of jobs) rose to 3.7% in April, the highest since 2001. The official openings series begins at end-2000 but earlier numbers can be estimated from help-wanted data compiled by former Fed economist Regis Barnichon. The current openings rate is close to the 2000 cycle peak of 4.0% – see first chart.

The job openings rate is inversely correlated with the unemployment rate, leading the latter at turning points by an average of four months since 1970. The level of openings forecasts the flow rate of unemployed people into employment. A rise in this flow could, in theory, be offset by an increase in layoffs. Weekly initial unemployment claims, however, remain low, as does the monthly layoff tally compiled by Challenger, Gray and Christmas.

Based on the average four-month lead, the further rise in job openings suggests that the unemployment rate will continue to fall until August, at least. Mr Barnichon’s model, indeed, predicts that the jobless rate will smash through 5.0% over the summer, reaching 4.5% by end-2015.

The job openings rate is positively correlated with pay growth, as measured by the annual change in the wages and salaries component of the employment cost index (ECI), with a six-month average lead at turning points since 1983, when the ECI series begins. The recent pick-up in pay growth, therefore, may extend into late 2015, at least – second chart.

A recovery in the Fed’s preferred inflation measure – the annual change in the personal consumption chain price index excluding food and energy – from its April level of 1.2% is probably also required, but labour market trends are consistent with a September interest rate rise.

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