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Clues about inflation are hiding in the employment numbers

Trading floors always used to buzz with a combination of ant..

Trading floors always used to buzz with a combination of anticipation and dread on the first Friday of the month when US payrolls numbers were released.

But these nonfarm payrolls have been relegated to the realm of trading floor sweepstakes and post-Friday lunch indulgence.

While the headline number still generates some excitement (mainly from those who are in sweepstakes), the impact it has on markets has diminished over time, with some people dismissing it as a random number generator.

Take last Fridays headline number as an example. In March, the US economy created 103,000 jobs – around 90,000 lower than expectations, which was mainly due to weather distortions.

At first glance, this was disappointing. But when taken with the previous months number of 326,000, the two-month average is still north of 200,000, while the 12-month rolling average is still around 190,000.

This is very high for this point in the economic cycle, as the US is fast approaching peak employment and is in its ninth year of expansion.

Many analysts expect the trend to slow. Erik Nielsen, chief economist at Unicredit, expects the trend to drop to around 150,000 over the next couple of years.

The other key indicator in the report – the unemployment rate – has also been remarkably stable, holding around 4.1 per cent.

At the moment, investors are more focused on the average hourly earnings, which provide valuable clues on wage growth – so much so that a “rogue” 2.9 per cent print for January was enough to send fixed income markets into a tizzy.

More crucially, though, is that this number is still far from pre-crisis levels, which has left economists scratching their heads about whether or not the Phillips Curve is broken.

It has equally left equity investors happy that this era of decent growth and low inflation is sacrosanct (for now anyway).

This conversation has dominated debates for at least a year now, and perhaps the answer is a lot simpler than we would like to admit: there is still hidden slack in the labour market.

One way to measure that is by looking at the underemployment rate, which is a broader measure of unemployment. It includes discouraged workers and those holding part-time positions for economic reasons.

In March, this figure fell back to November levels of eight per cent – its lowest reading in 11 years.

Therefore, the current US labour picture continues to look healthy, and most analysts are still predicting another two or three Fed rate hikes this year.

However, a lot of information can be gleaned if you look under the headline employment bonnet.

These should give valuable clues on the inflationary outlook over the next crucial months.

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