More Evidence That Employment is Surging, Interest Rates May Rise

The Labor Market Conditions Index came in better than expected.

The Federal Reserve released its latest Labor Market Conditions Index on Monday, which the central bank introduced in 2014 and began publishing on a monthly basis in October of that year. The index, which aims to offer a broad picture of the U.S. employment market, came in at a better-than-expected +1.6 in October, and the September index was revised upward from 0 to +1.3. After dipping in the spring, the index has been positive for six months, though not quite as high as in the years since the end of the recession (as calculated retroactively), which generally came in between 0 and +10. The Fed’s research department bases the index on 19 labor market indicators. It isn’t an official report, but members of the FOMC reportedly pay attention to it.

Though the index isn’t as well-known as certain headline job metrics that the government publishes, such as the U-3 unemployment or the more inclusive U-6 unemployment rates, it represents a comprehensive look at employment nationwide. The index is based on the official unemployment rate, labor force participation rate, part-time for economic reasons, private payroll employment, government payroll employment, temporary help employment, average weekly hours (production), average weekly hours of persons at work, average hourly earnings (production), and composite help-wanted index (published by the Conference Board).

It also includes the hiring rate, transition rate from unemployment to employment, insured unemployment rate, job losers unemployed less than five weeks, quit rate, job leavers unemployed less than five weeks, jobs plentiful vs hard to get (Conference Board again), hiring plans and jobs hard to fill (both by the National Federation of Independent Business). In short, the positive movement by the Labor Market Conditions Index is another signal of economic growth likely to be heeded by the Federal Reserve in its deliberations next month about interest rates.

The Fed has already made noises about raising rates (obliquely, as it always does). Conventional wisdom seems to be trending that way as well, and according to CME Group’s FedWatch program, the recent trading of interest rate futures implies that traders see a 70 percent chance rates will rise when the FOMC next meets, which will be on Dec. 15-16. Also, U.S. Treasuries prices dropped on Monday with two-year yields near their highest levels in more than five years, pointing to a sentiment among investors that rates will rise. All in all, there’s a distinct possibility that the long-anticipated higher interest-rate environment will be coming soon.