As the countdown to Friday’s jobs number begins, it might be instructive to get yet another perspective on the amount of slack in the labor market and its effect on wages.
Here’s a chart built at the St. Louis Fed website that clearly drives home the point — it perfectly captures the inverse relationship between the Unemployment Rate and Average Hourly Earnings:
I’d postulate that only when this gap starts to close meaningfully will we have to consider the possibility that the Fed will tighten and/or that inflation might be somewhere out there on the horizon. Until then, it’s very hard to envision they’ll consider moving off their ZIRP.
Additionally, there was much fanfare when ISM printed at an above-consensus 58.4. And certainly it’s good to have expansion in the manufacturing sector, to be sure. But we’re starting to get data points (like ISM) that are really more late-cycle than they are early-cycle. And the jobs market — admittedly a lagging indicator — is simply taking too long to play catch up. Here’s the ISM (Index, LHS) and Nonfarm Payrolls (YoY Pct. Change, RHS). I’ve adjusted payrolls by three months to clearly show the correlation and account for the lag. Is it too late to see a jobs recovery that’s going to even put a dent in the damage that’s been done over the past 25 months? That is the question.