Conflicting Trends: Inflationary Wage Increases and Rising Joblessness

Short but sweet from Barron’s Alan Abelson this morning:

"How bad was the employment report? Bad enough. Compared with the crowd’s expectation of 140,000 or so additions to payrolls — which in itself would have been nothing to write home about — a meager 113,000 jobs were added in July. And instead of holding steady as Wall Street’s soothsayers had forecast, the unemployment rate ticked up to 4.8%, the highest in five months, from June’s 4.6%.

The good news, at least for toilers, was pretty much limited to a brisk rise in average hourly wages: 0.4%, for the second month running. But what’s savory sauce for the goose may be a little too rich for the Fed, since it emits a distinctly inflationary odor.

In any case, our trusty economy watchers, Philippa Dunne and Doug Henwood of the Liscio Report, are not exactly ecstatic over the employment showing. They note that nearly half the gain in July was chipped in by health care, which generated 23,000 payroll additions, and bars and restaurants, which accounted for 29,000 of the new jobs. Neither obviously is an occupational area renowned for exceptional wage generosity. In contrast, manufacturing shed 15,000 jobs and the slump in housing unsurprisingly took its toll last month in the form of 9,000 lost slots.

As to what Bernanke will do, they cite the uncertainty created by the aforementioned conflicting trends of inflationary wage increases and rising joblessness. "Tuesday morning’s productivity and unit labor cost figures could prove unusually important," they suggest, "for the afternoon’s Federal Open Market Committee statement." So keep an eye cocked for those numbers."

Perhaps the Fed pause is somewhat less of a sure thing than many people believe . . .  hence, the intra-day reversal yesterday.


Bad Actor?
Alan Abelson
Barron’s, Monday, August 7, 2006

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  1. Leisa commented on Aug 5

    I see that Bill Gross at Pimco has already stated that the Fed will definitely pause. Personally, I give it a 50-50 chance. If no pause, there will be softening language. If a pause, there will be hard language about a followup left jab if inflation seems less than tepid. But, I say all of this with the caveat of “what do I know?”

  2. Sammy20 commented on Aug 5

    “Well, Household survey apologists: Come out and defend yourselves . .”

    The apologists can also stoop to a new low as Kudlow did last night. They could intentionally fail to even mention that the weak data even exists as Kudlow did last night even though he hosts a 1hour market based show. That guy is losing all credibility.

    I am in the pause/very tough talk camp…even though I think they need to go materially higher.

  3. Andy commented on Aug 5

    I’m in the camp of both a 1/4 point increase AND tougher talk about ensuring that inflation will be brought under control.

    However, here’s the sure bet: the market will first applaud, then freak out.

  4. edhopper commented on Aug 5

    “That guy is losing all credibility.”

    Uh, when did he ever have any credibility?

  5. Robert Cote commented on Aug 5

    There is so much casual labor in the housing construction sector a loss of 9,000 in this survey carries extra weight. If 9,000 are formally unemployed then there’s no overtime and comission earners are seeing partial employment, etc.

  6. McSwiggen commented on Aug 5

    Hey Sammy who the hell are you to criticize, Kudlow and his show? Go watch CNN. Kudlow is a CHAMPION.

  7. Craig commented on Aug 5

    I think Robert is correct. Many residential construction workers are either cash, illegal aliens, or otherwise off the books.

    When these folks are laid off they don’t show up in any numbers. 9000 documented represents a much larger number. For instance, in many areas of the country Firemen work so many days on and so many off. Many moonlight doing roofing or concrete work on their regular off days. As far as I know there is no way to measure this type of productivity/profit loss in the data available.

  8. ec0nj0hn commented on Aug 5

    As far as I know there is no way to measure this type of productivity/profit loss in the data available.

    oh, we’ll be seeing it in consumer spending soon enough.

  9. tjofpa commented on Aug 5

    …and speaking of Kudlow & Co, did I actually hear someone last night “suggest” that there may be “TOO MANY” option criminals out there to prosecute them all; and that the “SEC may have to drop its enforcement of this one”. HUH? WHAT?
    So, I guess its OK to falsify documents and steal $100’s of Millions from those whom u have a fiduciary responsiblity to, as long as everyone else is doing it.
    But when the cops find a roach clip in my ash tray during an illegal search, I end up spending 6 months in the slammer.

  10. spencer commented on Aug 5

    The productivity report will be interesting.

    The hours worked and GDP data implies that 2nd Q productivity growth will slow sharply — maybe under 1%. But the employee compensation data implies that wages and benefit growth is also slowing, so it will be anyones guess as what will happen to unit labor costs.
    But the double digit rise in S&P earnings implies that it is still in check and the spread between unit labor cost and price increase remains wide.

  11. muckdog commented on Aug 5

    On the up-tick in “bars and restaurants?” Maybe with all the new suburbs in the last few years, the “lag” is in strip mall construction. Maybe there are Chilis and Outbacks being built where folks live. Just guessing.

    Health care is an easier guess, as aging baby boomers will require more services. This sector should trend up for quite awhile.

    The economy is definitely slowing, and my fear is that the Fed will go too far. They’ve done that before. Recently…. (1999-2000). I think the bond market is a pretty good tell of where inflation is headed.

  12. Blissex commented on Aug 5

    «Conflicting Trends: Inflationary Wage Increases and Rising Joblessness»

    But there is no conflict: businesses are getting rid of many low paying jobs because they can be easily offshored, and are only retaining a smaller number of more highly paid ”strategic” workers.

    For example in IT jobs like programmer, tester, … etc. are shrinking, and there is ferocious competition among IT companies to hire the few ”best and brightest” young Ivy League graduates available for R&D and project management positions.

    I know several people with that profile who receive regularly multiple job offers by increasingly frantic employers who only headhunt ”perfect profile” candidates (and ”perfect profile” excludes anybody who is unemployed, by the way).

    It is somewhat true that from their point of view of employers there is a skill shortage: because the number of ”best and brightest” graduates by tier-1 institutions has increased much more slowly than the supply of ”bulk headcount” graduates, whom businesses find distinctly unattractive.

    Again, this kind of trend suggests which companies will see increased sales in coming decades.

  13. eric bloodaxe commented on Aug 5

    Perhaps they should raise the rate by 0.15%, just to confound everybody!

  14. Bluzer commented on Aug 5

    >I see that Bill Gross at Pimco has already stated that the Fed will definitely pause.

    Bill Gross and his minions have been trying to talk the Fed into pausing for a long long time. I remember Paul McCulley on CNBC – right after Katrina hit – stating emphatically “The FED is done!”. That was about six well deserved hikes ago. PIMCO’s extremely large holdings of long term bonds gives them a big axe to grind in this context. I’d use that as a contrary indicator, if anything.
    BTW Bill Gross and the other erudite economist at Morgan Stanley – Stephen Roach – also predicted, with no caveats, that the 10 year would yield between 3% and 4.5 %. This was made about a year ago. And the bond has spent very little time in that range since. Being well above it for most of the time.

    ec0nj0hn – I’m glad you picked up that ‘pardon’ point. I too thought that was remarkable – even unbelivable. If we condone millionaires helping themselves to additional millions just because ‘everyone was doing it’ are we that far removed from the jungle? Stop this planet…I want to get off…….


  15. cm commented on Aug 6

    Blissex: What also happens is that while looking for the “exceptional” candidate(s), candidates that are “merely” good are not considered, and when urgency prevails, sub par hires are made. And even with a good hire, there is the opportunity cost of not hiring one earlier.

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