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Goldman's NFP Post-Mortem: A December Rate Hike Is Now A "Close Call"

In addition to the Fed's credibility, one other privately-controlled organization that has seen its credibility completely crushed in recent months is the Goldman economic forecasting team (if not the team that "forecasts" Fed monetary policy, simply because Goldman controls the Fed and tells it what to do; as such what Goldman "thinks" the Fed will do is usually ironclad) whose Jan Hatzius "for what it's worth" forecast above trend growth for the US economy in 2014.

So, "for what it's worth", here is Goldman jobs report post-mortem (in a parallel report Goldman just cut its Q3 GDP forecast from 2.0% to 1.9%), in which the bank admits that the report was a disaster, and that as a result "we now see action at the December meeting as a close call."

1. The downshift in job growth continued for a second month, with nonfarm payroll employment increasing by just 142k in September (below consensus expectations of a 201k increase). Job gains for the prior two months were also revised down by a total of 59k. Private payroll growth increased by 118k in September, following a gain of 100k in August. The average increase in private payroll growth over the last two months of 109k has fallen well-below the 205k per month pace in the year through July. The slowing in private payroll growth has been fairly broad-based, with notable weakness last month in manufacturing (-9k), mining & logging (-12k) and financial services (flat). Government employment growth remained firm, rising by 24k.


2. Other details in the establishment survey were similarly downbeat. The average workweek declined to 34.5 hours, reversing its gain in July. Average hourly earnings (AHE) were unchanged on the month, and increased by just 2.2% from a year earlier. Although some weakness in AHE was to be expected based on calendar-related distortions, the result was below our forecasts which had taken these factors into account.


3. The household survey showed a decline in household employment of 236k (+269k on a payrolls-consistent basis). The U3 unemployment rate remained at 5.1%, but declined on an unrounded basis (from 5.112% to 5.051%), and the broader U6 underemployment rate fell three-tenths to 10.0% as a result of a large decline in involuntary part-time employment. The labor force participation rate fell two-tenths to 62.4%.


4. With payrolls, unemployment claims, consumer sentiment, vehicle sales, and a number of business surveys in hand, our preliminary read on the September Current Activity Indicator is +1.9%, down from the +2.7% figure in August.


5. In recent weeks we have argued that the FOMC is on a narrow path to liftoff in December—needing to see continued solid domestic growth, better inflation trends and easier financial conditions. At the moment we look to be off that path—domestic activity has slowed somewhat, and neither inflation nor financial conditions have improved—and we now see action at the December meeting as a close call.

Which, of course, should only come as a surprise to muppet clients: after all the same Goldman two weeks ago admitted that "our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016."

And what Goldman wants, Goldman gets, even if it means that now instead of a rate hike, the market should start pricing in the odds of a NIRP, or maybe even QE4, announcement in December.