Employment Situation, July 2017

This morning the Bureau of Labor Statistics released the latest monthly installment of its Employment Situation report, a long-standing series that monitors the state of the labor market in the US.

The report, a compilation of data from a large number of employers around the country,  estimates that a total of +209,000 new jobs were created last month (I’ve corrected a typo from an earlier version of this post).  Revisions to the prior two months’ data added another +2,000 new positions to that.

The unemployment rate came in at an ultra-low 4.3% of the workforce.  This figure is in line with recent experience, but one which would traditionally be regarded as indicating full employment plus a lot (the idea being that there’s a certain level (4.5%?) of frictional unemployment, basically people quitting one job to take another but not having yet started).

 

In the past, reaching full employment has also made itself known by accelerating wage gains, as employers bid up the price of the additional workers they need and raise wages all around for existing employees to ward off job poaching from rivals.

In perhaps the most perplexing aspect of this recovery, however, there’s still no sign of wage acceleration.  Wages are rising by a tad more than inflation but the rate of growth has remained steady at about 2.5%/year for a long time.

Although the +220,000 figure is 20% higher than the consensus guess of Wall Street economists, the stock market is regarding the ES with a shrug of the shoulders.  Only a sharp uptick in wage growth will make an impact (probably negative, at least at first) on stocks and bonds from this point on.

 

Employment Situation, October 2016

The Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation earlier today.  The results were not spectacular, but they were good:

–the economy added +161,000 new jobs last month

–revisions to the prior two months’ figures were both positive, totaling +44,000 positions.

Nothing in this to derail the Fed from raising the Fed Funds rate next month.

wage gains

Average hourly non-farm wages in the US were $25.92 in October.  That’s $0.10/hr more than in September and $.18 more than in August.  This doesn’t sound like much.  But the year-on-year growth in wages over the past year has been $.71/hr, which is a wage growth rate of 2.8%.  If we were to annualize the results of the past two months–not a calculation you’d want to bet the farm on–the growth rate is 4.2%.

Maybe too preliminary, but also maybe an early warning of rising wage pressure in the US.  The importance of that is that we would have (finally) reached full employment–meaning also that the Fed switching to rate-raising mode is at best timely.  At worst, it would mean that the Fed is at least a little late to the party.

Of course, given the scary example of Japan repeatedly tightening policy prematurely and snuffing out economic rebounds over the past quarter-century, the Fed has from the outset deliberately decided that later is better than sooner.  Nevertheless, further wage gains will translate into more aggressive Fed tightening moves.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US wage growth and lower oil prices

For the past year or so, income for low-paid workers has been growing steadily at about a 4% annual rate, double the speed at which income has been expanding for workers in general.  In addition, it seems to me that low-income workers benefit the most, in percentage terms, from the fall in energy prices.

This is not to say that low-income workers are exactly feeling flush.  But in incremental terms, they’re becoming better off at greater speed than their high-income counterparts.

In addition, many of the firms patronized by the wealthy, especially luxury goods purveyors, are international concerns exposed to things like the ongoing shift in China’s spending away from Western goods to domestic, as well as the lower value in dollars of their foreign sales.

Both trends suggest a shift in Consumer Discretionary exposure away from large multinationals and toward smaller, US-focused firms that cater to the man in the street.  The trick, though, is to find companies where the benefit from higher sales is greater than the increase in the wage bill for lower-income employees.  TGT, anyone?

why the Fed is looking at/for wage gains

This is Jackson Hole week, when the world’s central bankers convene in Grand Teton National Park in Wyoming to compare notes.  From their meetings, we’ll get a better sense of what the architects of the current emergency-easy money policy are thinking and planning.

Conventional wisdom  is that in times of economic stress the central bank should lower interest rates to a point significantly below the rate of inflation–and keep them there until people and companies borrow the “free” money and invest in large enough amounts to launch an economic rebound.

One indicator that the Fed is watching carefully is the rate at which wages are rising.  In theory, employers only raise wages a lot when they’ve run out of available unemployed workers and can expand only by headhunting away people who are already employed elsewhere.  So wage increases at a faster clip than inflation mean it’s high time to tighten money policy;  sub-inflation wage gains–the kind we have now–mean there’s no rush.

Policymakers appear to be giving this rule of thumb a rethink, however.

For one thing, short-term interest rates have been at effectively zero for over half a decade.  You’d think unequivocal signs of economic strength should have been evident long before now.

There’s no sign I can see that central bankers have any sympathy for the plight of savers (read: the Baby Boom and the elderly), whose desire for safe and stable fixed income investments has been the chief casualty of the economic rescue effort.  However, they do seem to be concerned that the search for yield in a zero-interest-rate world has caused savers to buy exotic instruments (hundred-year bonds, contingent convertibles, for instance) that will likely suffer wicked losses as rates begin to eventually rise toward a normal 3.5% or so.  Is the cure worse than the disease, at this point?

Lately, the money authorities seem to be expressing a second worry.  Suppose the emergence of inflation-beating wage gains isn’t the reliable indicator it’s thought to be.  If so, the Fed may be distorting the fixed income market–and buying trouble down the road–for no good reason.

Why would sub-inflation wage gains be the norm, even in an expanding economy?

Maybe in past economic cycles, high wage gains were caused mostly by the tendency of union contracts to index wages for inflation, not by overworking headhunters.  Maybe the psychology of managements penciling in inflation-plus or simply inflation-matching annual wage increases for the workforce has gone by the boards in a world that has experienced two ugly recessions–the more recent one an epic decline–since the turn of the century.  …sort of in the way inflationary expectations have disappeared from the minds of current workers.  Again, if so, maybe interest-rate normalization should happen at a faster pace than currently planned.

We’ll likely hear more on this topic as this week’s meeting gets under way.