I thought this analysis, from Yardeni Research (see public blog here) was very insightful.
US Employment: Good People Hard To Find. Friday’s disappointing employment report might have been misunderstood. As Debbie reports below, payrolls rose only 151,000 m/m during August, the fourth weakest increase over the past 12 months. Excluding government, it rose just 126,000. However, there is mounting evidence that the problem isn’t a shortage of jobs, but rather a dearth of able-bodied and able-minded job seekers. Consider the following:
(1) Unemployment pool shrinking. August’s unemployment rate was at 4.9% for the third month in a row (Fig. 1). That’s close to the previous two cyclical lows of 4.4% during May 2007 and 3.8% during April 2000.
During August, the 4.9% jobless rate reflected a short-term rate of just 3.7% and a long-term rate of 1.3%. The first component reflects workers who have been unemployed for less than 27 weeks, and was only slightly above May’s cyclical low of 3.5%, which is in line with the previous cyclical lows of 3.6% during March 2007 and 3.4% during October 2000. The latter component is down sharply from its record high of 4.4% during April 2010.
There are still 7.8 million people unemployed, comprising 5.8 million short-term and 2.0 million long-term unemployed (Fig. 2). But all three figures are down sharply from their cyclical peaks.
(2) Plenty of jobs available. In August’s consumer confidence survey, the Conference Board found that the percentage of respondents who said that jobs are plentiful rose to 26.0%, the highest since August 2007 (Fig. 3). The percentage saying that jobs are hard to get was 23.4%, near recent cyclical lows, and consistent with the cyclical low in the unemployment rate (Fig. 4).
(3) Record job openings. It’s actually somewhat surprising that nearly a quarter of respondents still say that jobs are hard to get given that job openings are at a record high. Perhaps many workers simply lack the skills required by the available jobs.
June’s JOLTS report showed that there were 5.6 million job openings. The ratio of the unemployed to job openings was down to 1.4 during June, near May’s 1.3, which was the lowest since April 2001, and down dramatically from the cyclical peak of 6.6 during July 2009 (Fig. 5). The NFIB monthly survey of small business owners found that during August the percentage with one or more job openings was 27.8%, the highest since October 2001, and that’s on a 12-month average basis (Fig. 6). The actual August reading was 30.0%.
(4) Unfilled positions hard to fill. NFIB’s August survey also reported the following litany of complaints by small business owners about the labor market: “Fifty-three percent reported hiring or trying to hire (down 3 points), but 46 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem. This issue ranks third out of nine major issues listed. Twenty-six percent of all owners reported job openings they could not fill in the current period, down 3 points from, the highest reading in this recovery.”
(5) Lots of full-time jobs. The household survey conducted by the Bureau of Labor Statistics (along with the payroll survey), showed a seasonally adjusted employment gain of only 97,000 during August, but that followed a jump of 420,000 during July. August’s increase was led by a 409,000 jump in full-time employment, setting yet another record high (Fig. 7). That was partially offset by a 388,000 drop in part-time employment. (Note: Full- and part-time workers don’t add up to total employment because total employment is seasonally adjusted independently of full- and part-time workers.) The good news is that part-time now accounts for 17.9% of total employment, the lowest since November 2008.
(6) Earned Income Proxy remains near record. That’s all very exciting stuff. However, our Earned Income Proxy (EIP) edged down 0.1% m/m during August as the lackluster gain in payroll jobs and wages was more than offset by a drop in the workweek. However, our EIP remains near July’s record high, and is up 3.5% y/y. (See our Earned Income Proxy.)
(7) What will the Fed do? A frequent grammatical mistake is to treat the word “data” as a singular rather than a plural noun. Fed officials have frequently said that monetary policy is “data dependent.” I presume that means that they are monitoring a bunch of data rather than one data point.
While August’s weak payroll number suggests that the Fed should continue to postpone the next rate hike, it is only one number. The overwhelming evidence is that the labor market is very tight and that another 25bps hike won’t do any harm.
My advice to Yellen for the September meeting of the FOMC: Just do it, even if it risks hurting your buddy Hillary. (We all know you won’t keep your job if the Donald wins.) Show that you have the guts to do at least one tiny rate hike per year. It will help your credibility, and then you can take the rest of this year off.
Wages & Productivity: More Puzzle Pieces. But, wait: Not so fast! What about the surprisingly weak pace of wages? How does that jibe with the labor-market-is-tight assessment? And what about productivity growth? It’s pathetically weak, suggesting that the neutral real federal funds rate might be close to zero, or even negative–all the more reason to be very cautious about tightening again. The mediocre pace of wages and productivity growth are among the biggest puzzles of the current business expansion. Here are some more of our thoughts on the two subjects:
(1) Yellen’s wage meter busted? Is there something wrong with Yellen’s dashboard? She first started talking about it in March 2014. It included a bunch of labor market indicators. She put the wage speedometer right in front of her steering wheel. Wage inflation was the only one of her indicators that she specifically targeted, saying that normalizing monetary policy would be most appropriate when wages are rising 3%-4% y/y.
She is probably tapping on this meter right now to see if it is broken. Despite all the indicators showing that the labor market is tightening, wage inflation remains stuck around 2.0%-2.5% according to August’s average hourly earnings index (2.4%) and Q2 hourly compensation (2.2% in the productivity report) (Fig. 8).
(2) Why aren’t wages rising more rapidly? There are a few explanations for the slow pace of wage gains. One possibility is that high-wage Baby Boomers are retiring and more jobs are going to low-wage Millennials. Workers may be afraid to push for big raises, fearing that that would provide an even greater incentive to employers to replace them with automation, robotics, and artificial intelligence. Since the Trauma of 2008, corporate managements have been obsessed with keeping a lid on their costs and maintaining high profit margins.
(3) No price-wage spiral. Perhaps the best and simplest explanation for the subdued pace of wage inflation even in the face of a tightening labor market is that price inflation remains so low. Global competition and technological innovations are keeping a tight lid on price inflation.
Notwithstanding the widely believed urban legend of stagnant wages, the fact is that inflation-adjusted wages are at a record high (Fig. 9). Average hourly earnings divided by the PCED is up 1.1% y/y through July, while real hourly compensation (as reported in the productivity release last week) also rose 1.1% y/y through Q2.
(4) Productivity is the known unknown. Over the past 20 quarters (five years) through Q2, nonfarm productivity growth is down to an annual rate of just 0.6% (Fig. 10). That’s the lowest since Q3-1982, and down from the most recent cyclical peak of 4.9% during Q4-2003. Productivity usually drops during recessions and recovers during expansions, but failed to do so this time, reminiscent of the similar depressing experience during the 1970s.
One possible explanation is that the economy’s output has been underestimated, as more of it is coming from hard-to-measure technology and services industries. If the data are correct, then perhaps the slow pace of demand growth (in a world of secular stagnation) is depressing productivity. Or, doesn’t the fact that most of the employment growth has been in services confirm that this sector is an obvious productivity laggard compared to manufacturing?
A related explanation is that small companies are less productive than larger ones, particularly if they produce services rather than goods. ADP collects the relevant data, which show that since the bottom in overall ADP payrolls during January 2010 through August of this year, small and medium-sized companies increased their headcount by 11.7 million, while large companies added only 3.3 million (Fig. 11). Over this same period, among small and medium-sized companies, the service-producing ones hired 10.4 million while the goods-producers hired only 1.3 million.
Reproduced with permission, all rights reserved.
Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.