One of the cleverest quotes to use the word “some” is: “Some are born great, some achieve greatness, and some have greatness thrust upon 'em,” from Shakespeare’s Twelfth Night.
US Federal Reserve Chair Janet Yellen’s prose may lack the obvious beauty of the Bard’s, but she and her fellow policy setters are equally crafty wordsmiths.
To be precise “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labour market”.
One word has enabled the Fed to both signal their satisfaction with progress in the labour market and remain deliberately vague enough to retain flexibility on the timing of the first rate hike.
The question for markets is what constitutes ‘some’, and how can we quantify something that is intended to be unquantifiable?
Improvement in the labour market means more than a fall in the unemployment rate and the Fed has a dashboard of indicators they monitor, which when taken together provide more of a mixed picture, making the interpretation of ‘some’ all the more difficult.
The report which gets the most attention is the non-farm payrolls and for good reason as it accounts for around 80 per cent of workers.
Last week’s report certainly seemed to support the ‘some’ improvement argument and was very close to market expectations.
Payroll jobs added 215,000 in July and while markets get excited about the release, for investors and the Fed what matters is the trend, and this year the trend has picked up since March with 211,000 jobs being added on average each month this year.
It’s also worth remembering that this figure is trying to estimate the monthly change in the total level of employment in the US, and it can be subject to heavy revisions and has a standard error of 60,000.
The headline unemployment rate has fallen steadily over the past five years from its April 2010 peak of 10 per cent to 5.3 per cent as of July, with the pace of decline consistently ahead of Fed forecasts.
Based on the fall in the unemployment rate alone you could argue that the economy is improving and that full employment (one of the two mandates that the Fed aims to achieve) is not far away.
However, there are questions over the quality of the jobs being added and at what point wage pressures, and hence inflation, will really kick in.
Like many things in economics the labour market is based on demand and supply. It could be argued that the improvement in the unemployment rate is more to do with a decrease in supply of labour and the decline in the labour force participation rate rather than the much healthier pick-up in demand.
The proportion of Americans aged 16 and over working or looking for work has fallen from near 66 per cent to 62.3 per cent in the last seven years.
This decline is being driven to some degree by structural elements, the largest reason cited for leaving the labour force is retirement, making it unlikely that we’ll see a sharp increase in the supply of labour anytime soon.
Perhaps the greatest mystery has been the lack of wage growth even though the labour market is generally improving.
Wages can be measured simply by looking at average hourly earnings or more sophisticated means such as the Employment Cost Index (ECI).
The ECI is one of the more reliable measures of wage inflation because it accounts for composition changes in the labour market.
The ECI was heading in the right direction, up until the latest release which showed the softest gain since 1982.
Again structural forces may be at play, the decline in importance of labour unions has reduced bargaining power and could be one reason why wage growth has not responded as history would suggest.
The Fed has consistently told us that its decision on the timing and extent of rate rises will be data dependent.
To me the data skews the probability towards a September rate hike over December.
However, there is no handbook to determine exactly what “some” means, the weak ECI number for June and mixed opinions on remaining slack make each of these upcoming data releases all the more important in the lead up to what is perhaps the most anticipated market event this decade.
Kerry Craig is a global market strategist for JP Morgan Asset Management.
