Tim Duys

Fed Watch DECEMBER 7, 2017

November Employment All Employees Average Wages

Preview
Annualized Wage Growth
8 5.0
2017:10 values:
1 month change = -0.45 4.5
6 3 month change = 2.14
12 month change = 2.43
The FOMC meeting next week is antic- 4.0

ipated to end with a rate hike. Indeed, 4 3.5

this is for all intents and purpuses already 2

3.0

2.5
a done deal. The employment report
0 2.0
wont change it. But the employment
1.5
report could either add or subtract to -2
1.0
FOMC concerns that the pace of activity
-4 0.5
remains sufficient to push the economy 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

toward overheating sooner than later. 1-Month Change (Left Scale) 3-Month Change (Right Scale) 12-Month Change (Right Scale)

The consensus forecast reasonably Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 12/07/2017 09:39

expects an outcome that leans toward

the former, with job gains well above
that necessary to hold the unemployment rate con-
stant. That outcome would leave the Fed committed
to their inflation forecast and hence inclined to main-
tain their projected policy path.
The consensus forecast expects a nonfarm payroll gain of
190k in a range of 153k to 250k. This strikes me as a rea-
sonable expectation consistent with my forecast:
Market participants anticipate the unemployment rate
holds constant at 4.1%, with a range of 4.0%-4.3%. To be
sure, a decline in the unemployment rate would deepen
overheating concerns on Constitution Ave. But I would
not expect those concerns to ease much if unemployment
stayed constant or even rose given the pace of job growth. unemployment is poised to remain on a downward trend.
Given the Feds view of labor force growth, they will expect
that a payroll gain near the consensus indicates continued
downward pressure on unemployment.
Until job growth slows to something close to 100k a
month, the Fed will anticipate further unemployment
declines. Hence why it would be much easier for policy-
makers to use the weak inflation numbers as reason to
pause if job growth looked to be trending much lower on a that falls short of consensus, however, would likely be
sustainable basis. But if anything the opposite is true - the
economy appears to have some considerable momentum
behinds it and is likely to rack up a third consecutive quar-
ter of 3+% growth as the year ends. This suggest contin-
ued demand for labor.
A pickup in wage growth would heighten Fed confidence
that the economy is indeed operating at full employment.
Wall Street expects wage growth of 0.3% for the month, in
a range of 0.1%-0.4%. This translates into a range of 2.5%-
2.8% compared to a year ago, putting it potentially at the
higher end of recent trends:.
Obviously, the Fed would like to see something on the
higher end to help confirm their estimates of full employ-
ment. But even if they dont get higher wages, they will
anticipate wages gains will eventually accelerate as long as
Bottom Line: The Fed would have an easier time
paying attention to the weak inflation numbers if the
economy has not operating near their estimates of full
employment and clearly growing at a pace that will
soon surpass those estimates. Consequently, a report
near consensus expectations will tend to strengthen
their resolve regarding further rate hikes. A report
deemed as noise given the generally solid path of eco-
nomic activity this year.
Tim Duys FED WATCH DECEMBER 7, 2017

Nonfarm Payrolls Forecasts

Monthly Change, Thousands
600

400

200

-200 November 2017 Forecast = 169.27

95% Condence Interval = ( 1.99 , 336.54 )
-400 68% Condence Interval = ( 84.77 , 253.76 )

-600

-800

-1000

-1200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Nonfarm Payrolls One-Step Ahead Forecast 95% Condence Interval

Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Chart created: 12/06/2017 06:44

US Labor Market Indicators

10
Labor force 12-month change (left scale)
Nonfarm payrolls 12-month change (left scale)
Unemployment rate (U3, right scale)
9
8
7
6

Unemployment rate, %
Change, thousands

5
4
4000 3

2000

-2000

-4000

-6000

-8000
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 12/07/2017 09:39

2017 University of Oregon; Tim Duy. All rights reserved. 2

Tim Duys FED WATCH DECEMBER 7, 2017

Spread Between 10 Year and 2 Year Rates

US Treasury Bonds
3.0

2.5

2.0

1.5
Percent

1.0

0.5

0.0

-0.5

-1.0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 12/07/2017 09:36

oregon
Timothy A. Duy

economic
Professor of Practice
Oregon Economic Forum, Senior Director
Department of Economics
University of Oregon forum

Professor Duy received his B.A. in Economics in 1991
from the University of Puget Sound, and his M.S. and
Ph.D. in Economics in 1998 from the University of
Oregon. Following graduate school, Tim worked in
Washington, D.C. for the United States Department
of Treasury as an economist in the International Affairs
division and later with the G7 Group, a political and
economic consultancy for clients in the financial industry.
In the latter position, he was responsible for monitoring
the activities of the Federal Reserve and currency
markets. Tim returned to the University of Oregon in
2002. He is the Senior Director of the Oregon Economic
Forum and the author of the University of Oregon
Statewide Economic Indicators, Regional Economic
Indicators, and the Central Oregon Business Index.
Tim has published in the Journal of Economics and Business
and is currently a member of the Oregon Governors
Council of Economic Advisors and the State Debt Policy
Advisory Commission. Tim is a prominent commentator on
the Federal Reserve. MarketWatch describes his blog as
influential. The Huffington Post identified him has one
of the top 26 economists to follow on Twitter, and he is
listed on StreetEye as one of the top 100 people to follow
to discover finance news on Twitter. Major national and
international news outlets frequently quote him, including
the New York Times, the Washington Post, the Financial
Times, the Wall Street Journal, and Bloomberg. He also
writes a regular column for Bloomberg Prophets.
Notice: This newsletter is commentary, not investment advice.

duy@uoregon.edu

541-346-4660
ECON
Economics

@TimDuy

2017 University of Oregon; Tim Duy. All rights reserved. 3