NFP: Watch the Comp

Last month, we retired the Over/Under bet. The monthly and annual BLS revisions have conspired to make the initial numbers all but worthless. As an economic indicator, the monthly NFP data is wanting (Household Survey is worth even less). If we take these revisions at face value, the initial number is so unreliable by such a large factor as to be meaningless noise.

The initial BLS data’s does retain some merit, however, in that it is now a form of entertainment. Perhaps the Bureau should consider releasing the reports on YouTube.

Since we brought up these revisions, let’s review some recent payroll data revisions you may overlooked: revision to Compensation. There has been much said about the uptick in income and wages over the past few months. My pal Larry has been all over it; So too, has the White House been lauding the acceleration in compensation growth.

Such rejoicing was premature. The most recent update to the second quarter real compensation data was a dramatic downward revision.

Haver Analytics gives us the details:

"Compensation per hour, however, was revised sharply with the 3Q estimate taken down one percentage point to 2.6% growth. Combined with a huge downward revision to 2Q growth to -1.2% from +6.6% (not a typo) it lowered the y/y change to 4.3% which is on a par with the growth during the last several years.

The revisions to compensation lowered unit labor costs sharply as well to 2.3% growth last quarter. Growth during 2Q was lowered to -2.4% versus a previously estimated 5.4% gain. During the last thirty years there has been an 85% correlation between labor cost growth the growth in the GDP chain price deflator, although that correlation has fallen sharply in recent years."

Despite what you have heard, there is very little wage pressure throughout most of the system. Select, high paying jobs that require highly educated workers have wage pressure. Most of therest of the labor market does not. Kids, that’s a lesson worth learning: Don’t just stay in school, but keep adding letters after your name — Grad School is the new college.

The Fed is thought to be closely watching the comp portion of NFP closely. The chatter has been that there is a tight labor market, and wage pressures are rising. The Fed has been jawboning about inflation pressures, and has been using the wage increase as an example of why they might tighten.

It turns out this is utter nonsense. Excepting for a very specific cross section of technical jobs that there is a shortage of qualified workers for, labor remains both cheap and plentiful in the U.S. Its also apparent that Global Outsourcing has reintroduced a competitive pricing factors into the US Labor Market.

Have a gander at these charts: Labor costs remain muted, and Real Compensation is soft:



Courtesy of Haver Analytics

Courtesy of Professor Menzie Chinn, University of Wisconsin



Bottom line: The Fed will supposedly be watching the NFP for signs of a tight labor market and economic re-acceleration. The Smart Money is waiting for a more accurate picture after the inevitable revisions.

Of course, that won’t stop the report from being market moving short term.  Traders are advised to be aware of what is to follow . . .


UPDATE: December 8, 2006, 9:50am

Numbers are out:

Nonfarm payroll employment rose by 132,000 in November; Unemployment
Rate was essentially unchanged at 4.5 percent. Gains came primarily in services, health care and retail. Employment declined in construction and manufacturing.

Surprise! Hourly earnings growth slowed. So much for the supposedly tight labor markets.


U.S. Productivity Little Revised, Compensation Lowered Sharply
Tom Moeller
Haver, December 5, 2006

Compensation Catch-up Postponed
Menzie Chinn
Econbrowser, December 07, 2006

Establishment DATA
BLS, Friday, December 8, 2006

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What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Dec 8

    I wandered into a tradin’ post yesterday named Kohl’s around 2:30pm. I was in the store for about 25 minutes in the men’s and women’s sections and things were quite slow (not to mention a veritable forest of sale signs.) There were two purchases in that time, so what were the employees doing? Well…

    Two gals in the men’s dept. gave no mind who was around them. In about 45 seconds discussing their personal relationships, they managed to drop 3 or 4 f-bombs and one sh*t. I guess this is the time of year when generous retailers are willing to employ just about anyone…

    The two gals in the women’s area were much more high-brow. Though their complaints centered around help wanted signs at the front of the place meanwhile hearing from management about budget cuts. To quote one of the gals, “They need to take care of the people they already have.”

  2. JoeyB commented on Dec 8

    Today’s numbers are more grist for the soft landing, imho.

  3. Jeremy commented on Dec 8

    Dollar heading south again
    in spite of NFP

  4. Gary commented on Dec 8

    Because at some point you have to wake up and see that the king has no clothes no matter how much the government would like us to believe otherwise.

  5. bodanker commented on Dec 8

    Wow, stock futures took a nosedive right before the stock market opened. Looks like whoever said that a “good” NFP report would be bad for the market was right.

  6. Macro Man commented on Dec 8

    Dollar weakness has very little to do with payrolls and a whole lot to do with the central banks of China, Russia, and the middle east selling the crap out of it.

  7. JoeyB commented on Dec 8

    Ticker Sense has an interesting bit of data, asking who has it “right”, stocks or bonds? The set up is that bonds and stocks are both trading near their highs. Conventional wisdom has always been, the bonds are “smarter” (economy slowing)…but these results show just the opposite:

  8. DD commented on Dec 8

    “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

    — For you Barry.

  9. Aaron commented on Dec 8

    “Today’s numbers are more grist for the soft landing, imho.”

    RTFA, then go look at the revisions to last months numbers.

  10. Macro Man commented on Dec 8

    Net upward revisions of 42k in Sep-Oct? Looks like it supports his case… September has now been revised up from initial 51k to “final” 202k. So instead of being 79k below consensus, as at time of intial release, it is now 82k above the then-consensus.

    These numbers really are a joke…

  11. Andy commented on Dec 8

    ‘Tight’ Labor Market May Slim
    Rate-Cut Chances, Economists Say
    December 8, 2006 10:36 a.m.

    U.S. payroll growth accelerated during November, while worker wages grew slightly less than expected and the unemployment rate ticked higher. Nonfarm payrolls increased by 132,000 after growing a revised 79,000 in October and 203,000 in September. The unemployment rate edged up to 4.5% in November from 4.4% a month earlier. Average hourly earnings increased three cents, or 0.2%, to $16.94 from October’s $16.91. Here’s a look at what economists think the data mean for the job market, the economy and future Federal Reserve rate moves.
    * * *

    The labor market remained quite tight in November. However, labor market tightness is at best a coincident indicator and more generally a lagging indicator of economic strength, so changes in joblessness will not drive Fed policy. Nevertheless, these data indicate that the economy is in pretty good shape despite the spate of unfavorable reports in recent weeks. They also reduce the likelihood that the Fed will ease any time soon. — Steven A. Wood, Insight Economics
    * * *

    The economy continues to absorb job losses in construction and manufacturing well. Despite three consecutive monthly declines in manufacturing and construction employment, nonfarm payrolls have risen by an average of 138,000 (and the household survey on a payroll basis shows much stronger gains of 395,000 per month on average over the same period). In addition, we continue to see upward revisions to the payroll data. With the labor market tight and average hourly earnings growth continuing to rise, the gains in employment do not support the view that the Fed will be cutting rates in 2007. – Bear Stearns Economics
    * * *

    The report reinforces other data showing that outside of housing and manufacturing, the economy is holding up well. The report also indicates that the labor market remains tight, and that the economy is continuing to generate the jobs needed to perpetuate growth while the economy absorbs the shock from housing. — Patrick Newport, Global Insight Inc.
    * * *

    Services hiring remained robust, with health care and restaurants leading the way, as usual. With the upward revision to September and the downward revision to October, the pattern of strength in the summer and a slowdown in the fall looks even more distinct than before. – RBS Greenwich Capital
    * * *

    The main goods-producing industries — manufacturing and construction — seem to be in the midst of a deepening contraction. Employment fell in both with each recording the largest two-month job loss in over three years. Consistent with the strength in the ISM non-manufacturing index, employment in the service-providing industries continued to expand at an impressive pace. Retailers added 20,000 workers last month, presumably in anticipation of a good Christmas selling season. – Nomura Economic Research
    * * *

    For the markets and Fed, this reports is not a big mind-changer. Payroll growth is slowing but has not collapsed; that requires layoffs to rise properly. Latest claims numbers suggest that is just starting, so Dec/Jan payrolls are key to our forecast for a March [Fed rate] ease. — Ian Shepherdson, High Frequency Economics
    * * *

    [The report] was pretty much in line with market expectations, with the payroll numbers a touch stronger and other elements basically as expected. There is nothing here to move the FOMC out of its sideline seat, in which it looks to be increasingly comfortable. — Joshua Shapiro, MFR Inc.

  12. lurker commented on Dec 8

    Maybe we should be watching the dollar and not the stock and bond markets…
    Barry, have you opined on the buck recently?

  13. Mike_in_FL commented on Dec 8

    This is truly a Maalox day with regards to the report. First Treasuries sell off and the dollar rallies on the jobs news … then Treasuries rise and the dollar drops … then Paulson talks and the markets reverse again. So is this report bullish for bonds and bearish for the dollar … or bearish for bonds and bullish for the dollar? What about stocks? I’m ready to throw up my hands, frankly. Is it 4 o’clock yet? LOL

  14. Lord commented on Dec 8

    Actually, worker shortages are mostly in blue collar specialties, truck driving, energy development, welding. While graduate degress are beneficial now, after all these underemployed college graduates get one we will see a large surplus there as well.

  15. rob cyran commented on Dec 8

    Two sub-prime lenders collapsed this week-
    Sebring and Ownit.

    Let’s see what next week brings.

  16. Cherry commented on Dec 8

    LOL Lord, that would mean me(underemployed college grads). Though I got this temp job as a line supervisor for a major food company, not half bad and they offered me a “extended time” with possible full employment in the future…….considering the non-nominal and misleading indicators I used to get the job(Barry talk), maybe I should check out now?).

    What is funny about “Septembers” big revisions, was that the government were a big part of those revisions. If anybody needs to cut costs and lay people off, it is the government(especially those 100000 plus contracters in Iraq, move the bleep on).

    My theory has been two fold why this supposed “full employment” economy isn’t driving up wages:
    1.Bush era employment figures throw people out of stats meaning less people are employed than they are saying.
    2.The “Big” government joke actually is true under Bush, a surge of government hiring under Bush for the Iraq war(a nice chunk) has lowered unemployment without doing much for wages.

    In otherwords, Private job growth isn’t close to era heights, or even Vietnam era heights(historical expansions). When the Vietnam era boom was at its peek, unemployment fell into the mid-3’s where if we had historically good job growth, where we should be now. Between the statistical slights and the government hiring boom, you have what supposedly looks like a “tight labor market”, but what we have is a pretty run of the mill labor market that would have been close in 1995 or H1 1996 in terms of job creation by the private sector where we expect most of our job growth to come from. In otherwords using unemployment as a indicator for “full employment” would be closer to 4% for this expansion. The UE rate this year is around 4.6-4.7% which isn’t good enough.

    By the way, the Kennedy/Clinton(revising current BLS government numbers to under the last Clinton year and estimating left off persons) UE rate was 5.5% for November. Touche.

  17. Teddy commented on Dec 8

    The charts above are wrong because they don’t take into account the 10% inflation rate for EACH of the last 2 years (Wall Street calls this increased productivity) that if depicted, would drive real compensation per hour into negative territory for the last 25 years. I lived thru the 1970’s and believe me the inflation in the last 2 years is worse.

  18. Rick45 commented on Dec 9

    My favorite from todays “interview” with Sec. Paulson on b’vision:

    M.B. “So Mr. Secretary are you worried about Inflation.”

    H.P. “Oh no Maria, thats Mr. Bernanke’s job.”

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