(Reuters) - The U.S. unemployment rate will fall well below 5 percent, spawning a faster pickup in wage inflation and a series of Federal Reserve interest rate hikes this year, according to the top U.S. economic forecaster in Reuters polls for 2015.
Jim O‘Sullivan of High Frequency Economics, who also won the previous year based in part on confidence in the improving jobs market, says there are few reasons to worry that the fall in unemployment will halt soon or that a recession is near.
His conviction stems from one of the most reliable economic indicators, jobless claims, which is an actual tally of people claiming benefits, not data derived from surveys.
The jobless claims figures have been broadly consistent, he says, and when averaged out, provide a very good guide to the trend in non-farm payroll employment data, which always get the most attention each month from financial markets.
Several times last year, particularly after a disastrous first quarter when there was originally no economic growth reported at all, O‘Sullivan said he held his nerve while many others worried the economy was turning down.
“There was a question of how much of it was weather, but hey, maybe not all of it was weather -- and then you got the March and April employment reports which seemed to imply that hey, things are really slowing,” O‘Sullivan said.
“But claims were saying no, don’t worry, don’t panic, don’t extrapolate. And sure enough, payrolls roared back in May and GDP bounced back in Q2.”
After touching a four-decade low, initial weekly jobless claims have edged up, averaging 270,000 in the fourth quarter of 2015. The recent rises -- the latest was 285,000 -- do not signal a change in the trend, O‘Sullivan said.
This suggests the jobless rate will fall further, and at some point soon, it will start to push up more significantly on already-rising wage inflation.
O‘Sullivan warns not to take the disappointing 0.7 percent annualized growth rate reported for the fourth quarter as a leading indicator of where the economy is headed, especially with more than an average 200,000 jobs created each month.
“The employment numbers are telling the right signal. Don’t extrapolate a weak GDP number just as you shouldn’t have in the first quarter of last year,” he said.
Monthly payroll growth would need to fall below 100,000 to stop the downtrend in unemployment, according to O‘Sullivan.
“And again, that will happen at some point of course, but I just don’t see it happening right now.”
His biggest assumption, however, is that financial markets will find their footing after a terrible start to the year. That is by no means guaranteed.
High Frequency Economics topped a list of 60 forecasters in the U.S. that were graded by StarMine for accuracy on a set of key monthly data releases in 2015, including GDP, inflation, consumer confidence, unemployment rate, as well as the purchasing managers’ surveys of business activity.
Reporting by Ross Finley Editing by Jeremy Gaunt