Friday, January 8, 2016

Mind The Wage Gap?

Sho Chandra of Bloomberg reports, Payrolls in U.S. Rise More Than Projected, Jobless Rate at 5%:
Payroll growth surged in December after stronger job gains the prior two months, capping the second-best year for American workers since 1999 and further evidence of a resilient job market that prompted the Federal Reserve to raise interest rates.

The 292,000 advance exceeded the highest forecast in a Bloomberg survey and followed a 252,000 increase in November that was stronger than previously estimated, a Labor Department report showed Friday. The median forecast in a Bloomberg survey called for 200,000. The jobless rate held at 5 percent, and wage growth rose less than forecast from a year earlier.

Such job-market durability indicates employers were sanguine about the economy’s prospects just before the recent rout in global financial markets. Fed policy makers are counting on tighter labor conditions to lead to broader increases in worker pay and inflation.

“Job creation was solid in December,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed economist. “This should calm some fears about the U.S. economy losing growth momentum. It’s reassuring in the backdrop of some recent economic reports that were weak.”

The December job gains, which were probably helped by mild winter weather across much of the country, were led by temporary-help services, health care, transportation and construction.

Labor Department revisions to prior reports added a total of 50,000 jobs to payrolls in the previous two months. For all of 2015, payrolls climbed by 2.65 million after 3.1 million in 2014 for the best back-to-back years for hiring since 1998-99.
Economists’ Forecasts

December payroll estimates of 92 economists in the Bloomberg survey ranged from gains of 135,000 to 250,000. November was initially reported as a 211,000 increase. The unemployment rate, which is derived from a separate survey of households, matched the median forecast.

With the latest jobs report, the Bureau of Labor Statistics also issued revisions for data from the survey of households dating back to 2011. Payroll figures from the survey of employers will be revised when the January data is released Feb. 5. There were no revisions to the rates in any month last year, when unemployment averaged 5.3 percent.

While employers continue to aggressively add to headcounts, worker pay has yet to show a sustainable pickup. Average hourly earnings were unchanged from the prior month. They increased 2.5 percent over the 12 months ended in December. The median forecast called for a 2.7 percent year-over-year gain (click on image).


The advance, which was the biggest since October, was primarily due to an easy comparison with December 2014, when earnings fell 0.2 percent from the previous month. This so-called base effect will probably result in some payback with the January employment report when earnings come up against a strong January 2015 comparison.

The average workweek for all workers held in December at 34.5 hours.

Another caveat about the wage and hours results: The Bureau of Labor Statistics found a processing error in the data from March 2006 through February 2009 and will issue corrected figures on Feb. 5.

The participation rate, which shows the share of working-age people in the labor force, increased to a four-month high of 62.6 percent from 62.5 percent.

Among measures of labor-market slack, the number of Americans who are working part time though would rather have a full time position, or the measure known as part-time for economic reasons, eased to 6.02 million from 6.09 million.
Underemployment Rate

The underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want to work but have given up looking -- held at 9.9 percent.

Employment over the final three months of 2015 increased 284,000 on average, the most since January 2015.

Hiring gains last month were broad, with construction adding 45,000 jobs, health-care providers taking on 52,600 and temporary help services boosting headcounts by 34,400. Factories even added the most jobs -- 8,000 -- in five months.

Minutes of the Fed’s December meeting, when policy makers boosted their target rate for federal funds, showed participants acknowledged the improvement in labor market conditions. Many judged it as “substantial.”

“Members agreed that a range of recent labor market indicators, including ongoing job gains and declining unemployment, showed further improvement and confirmed that underutilization of labor resources had diminished appreciably since early this year,” according to the minutes, released on Wednesday. At the same time, Fed officials said there was room for slack to be absorbed and signaled further hikes in interest rates would occur gradually.

On Thursday, the Standard & Poor’s 500 Index capped its worst-ever four-day start to a year as turmoil in China spread around the world. Selling in global equities began in China, where shares fell 7 percent after the central bank weakened the yuan an eighth day. Crude settled at a 12-year low, and copper dipped below $2 for the first time since 2009.
So, the December U.S. jobs report came in better than expected and everyone is making a big deal out of it. The same thing happened in Canada where last month's job growth smashed expectations but when you pull the curtain back to take a closer look, it really doesn't look good at all.

I've already discussed the Canadian economy extensively on my blog. I told my readers about Canada's perfect storm back in January 2013 and continued to warn everyone to short the loonie in December of that year because I saw oil prices going much lower. Given my Outlook 2016, I see no reason to change my views on Canada, oil or the loonie (the loonie is a petro currency; I see it going to 66 cents US or lower depending on how bad the next global crisis is before eventually settling around 66-68 cents for a very long time).

I want to focus my attention on the U.S. economy since the perceived wisdom is the U.S. will lead the world out of this global economic morass. Interestingly, I took a snapshot of the market's reaction after the data was released before the opening bell (click on image):


And  here is a snapshot an hour into the session (click on image):


Notice how fast traders sold the news? This doesn't mean much as stocks can still end Friday up, but clearly they are struggling this week (update: stocks ended in the red on Friday capping the worst start to the year ever on growth concerns from China).

I always look at the bond market to gauge how it digests the jobs numbers. Stock traders are too erratic and typically let their emotions dictate their trading. Bond traders are more methodical, very skeptical and will throw cold water on any jobs report.

The reaction of the bond market tells me nobody is buying this great U.S. recovery story (bond yields dipped after the report). Despite the solid job gains, I'm certainly not buying that there is a major U.S. economic recovery unfolding and will share with you a key reason as to why.

While the trend in jobs growth is encouraging, wages are stagnating and if the mighty greenback keeps surging higher and a profits recession develops, I expect to see major weakness in the jobs market in the second half of 2016 and even more wage stagnation going forward.

I bring this up because I think a lot of economists just don't get it. Inflation expectations will never pick up until you get a significant pickup in wage growth. Period. And for this to happen you need to see a huge pickup in the labor force participation rate and a drop in the chronically unemployed and under-employed.

The Economic Policy Institute does a great job discussing and monitoring wage growth in its Nominal Wage Tracker which was just updated:
On some fronts, the economy is steadily healing from the Great Recession. The unemployment rate is down, and the pace of monthly job growth is reversing some of the damage inflicted by the downturn. But the economy remains far from fully recovered.

A crucial measure of how far from full recovery the economy remains is the growth of nominal wages (wages unadjusted for inflation). Nominal wage growth since the recovery officially began in mid-2009 has been low and flat. This isn’t surprising–the weak labor market of the last seven years has put enormous downward pressure on wages. Employers don’t have to offer big wage increases to get and keep the workers they need. And this remains true even as a jobs recovery has consistently forged ahead in recent years.

Despite the incomplete nature of the recovery, influential voices are already calling for the Federal Reserve to guard against inflation by raising interest rates to slow the economy. The stakes in this debate are high. Macroeconomic policy (including monetary policy) that prioritized very low rates of inflation over low rates of unemployment is a key reason why real wages have stagnated for the vast majority of American workers in recent decades (as we have shown through our Raising America’s Pay initiative). Widespread wage growth will not occur over the coming years if the Federal Reserve prematurely slows the recovery in the name of fighting prospective inflation.

The following charts–which will be updated regularly when new data are released–help explain why the Fed should hold off on raising interest rates until nominal wages are growing at a much faster pace. Until nominal wages are rising by 3.5 to 4 percent, there is no threat that price inflation will begin to significantly exceed the Fed’s 2 percent inflation target. And it will take wage growth of at least 3.5 to 4 percent for workers to begin to reap the benefits of economic growth–and to achieve a genuine recovery from the Great Recession:




Note on the nominal wage target

The nominal wage target of 3.5 to 4 percent is defined as nominal wage growth consistent with the Federal Reserve’s 2 percent overall price inflation target, 1.5 to 2 percent productivity growth, and a stable labor share of income. As an example, if trend productivity growth is 1.5 percent, this implies that nominal wage growth of 1.5 percent puts zero upward pressure on overall prices; while an hour of work has gotten 1.5 percent more expensive, the same hour produces 1.5 percent more output, so costs per unit of output are flat. Nominal wage growth of 3.5 percent with 1.5 percent trend productivity growth implies that labor costs would be rising 2 percent annually–and if labor costs were stable as a share of overall output, this implies prices overall would be rising at 2 percent, which is the Fed’s price growth target.
Now, we can discuss the structural reasons as to why wages are stagnating, everything from demographics to education and technology, but the crucial point I'm making is that nominal wage growth has been extremely weak since the recovery took place in 2009 and it doesn't look like it will improve any time soon.

And if you think about the Fed raising rates with global deflation and a profits recession looming, you can understand why many think it's making a major policy blunder which will only lead to more deflation and wage stagnation.

Bottom line: Forget the hoopla on the U.S. economic recovery, it's all a chimera! Until you see a significant pickup in nominal wages, there will never be a sustained pickup in economic activity. And for this to happen, we need a new macroeconomic paradigm which recognizes that rising inequality is deflationary.

Below, Jan Hatzius, Goldman Sachs chief economist, discusses the December jobs report, stating it was a good report. If you ask me, Hatzius needs to mind the wage gap and trust me, if markets keep heading south, the Fed will backtrack fast on rates.

On this last point, Allianz chief economic adviser told CNBC the bigger issue for financial markets is that central banks are running out of ammo. "Markets are realizing that central banks can no longer repress financial volatility. And they are repricing to new volatility paradigm," he said in a "Squawk Box" interview (see below).

I take this stuff on central banks "running out of ammo" with a shaker of salt. There will be a Minsky Moment but it's too soon to declare central banks the losers in the titanic battle against deflation.

On that note, many of you need to step up to the plate and donate and subscribe to my blog. From my Outlook 2016, to my comments on Soros and pension deficits, to this comment on minding the wage gap, I provided you great insights this week on markets and pensions you simply won't read elsewhere.

In fact, while the stock market is off to a terrible start to the year, I've provided you with comments to help guide you through a very difficult investment landscape. So, please kindly donate or subscribe to my blog via PayPal under my picture. Thank you and have a great weekend!!


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