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Why I don't buy the 4.5% Unemployment Rate

Where is the wage pressure?

That's the question on my mind as we await today's NFP. Yesterday saw a stronger than expected ADP Report, which whacked bonds and sent yields back over the 5% level; The 10 year closed at 5.144%. A prime mover: growth in service industries, which accelerated to the fastest pace in 14 months in June.

The Fed will be closely watching the data for signs that Average Earnings are rising, as a gauge of potential inflation.

Which brings us back to our original point: If Unemployment is actually as low as its been reported by BLS, then there is no slack in the labor market. We have a situation where demand is outstripping supply. In the Oil market, that sends prices higher. In Agricultural commodities, the same thing occurs. Indeed, in every market I can think of, when Demand is greater than Supply, prices rise. That's Econ 101: prices should be rising robustly in that environment. 

Yet we see little evidence that wages and salaries are moving appreciably higher. Outside of bonuses and stock options, most wages have been pretty stagnant. For most of the past 4 years, they had been falling on a relative basis to inflation. Its only the past few quarters or so that hourly wages have risen at the rate of inflation or better.

A sign of a slack labor market is sluggish wage gains. Which is pretty much what we have been seeing.

The WSJ's Ahead of the Tape column looks at the same issue, and asks a different question:

The Federal Reserve says measures of inflation have improved lately. But it's still worried that there's little slack in the economy, which could ultimately push prices and interest rates higher. A key measure of slack is the unemployment rate. When it gets very low, it can be a signal of labor shortages that create wage and price pressures.

The labor market appears to have weakened a bit. Through May of this year, surveys of U.S. businesses show they added an average of 133,000 nonfarm jobs per month to their payrolls, according to the Labor Department, down from last year's average of 189,000.

Yet even though job growth has been slowing, the unemployment rate isn't budging. It is expected to come in at a relatively low 4.5% for June, around the level it's been at for nine months. This is all the more striking because the survey of households that the Labor Department uses to calculate the unemployment rate shows especially paltry employment gains through May this year. Those paltry gains suggest the unemployment rate should be rising.

His take is that since NFP gains have been on the low side, we should see unemployment tick up. My view is that all these Quarters of low unemployment should have sent wages skyrocketing, late 1990s style.

Yet neither has happened.  I cannot help but wonder why . . . 

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Where's the wage pressure?

chart courtesy of economagic

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A few other things to watch for:

1) ADP data showed private sector job creation of 150k. That is the number of total NFP the economy needs to merely keep up with population growth and immigration each month. Watch for a celebration of mere population growth.

2) The June number enjoys a healthy Birth Death adjustment.  Bill King noted that "Last June the BLS created 166,000 (175k Prelim) Net B/D Model jobs out of thin air."

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UPDATE: July 6, 2007 8:39am

WSJ:

"Nonfarm payrolls increased 132,000 in June, after swelling 190,000 in May and 122,000 in April, the Labor Department said Friday. Previous reports showed job growth of just 157,000 in May and 80,000 in April. Monthly job growth has averaged a robust 145,000 so far this year. The unemployment rate was unchanged last month at 4.5%.

Average hourly earnings increased $0.06, or 0.3%, to $17.38. That was up 3.9% from a year earlier, suggesting tight labor markets still aren't putting much pressure on labor costs."

A few notable data points from the release:

• B/D Adjustment was +156k

• Education and health services were strong at +59k, as was Leisure and hospitality +39k and Government +40k

• Construction employment was up by 12,000  (WTF?)

• Professional and business services were down 9k

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Sources:
ADP Employer Services Says U.S. Added 150,000 Jobs
Shobhana Chandra
Bloomberg, July 5 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ.DttbnfLwQ&

Help Wanted: A Labor Report With Some Slack
Justin Lahart
WSJ, July 6, 2007; Page C1
http://online.wsj.com/article/SB118368257096758684.html

CES Net Birth/Death Model 
http://www.bls.gov/web/cesbd.htm

Employment Situation
http://www.bls.gov/news.release/empsit.toc.htm

Friday, July 06, 2007 | 07:13 AM | Permalink | Comments (50) | TrackBack (3)
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Comments

Don't have any idea of this will show the break or not, but August's BED will be very interesting either way. 0827 EST

Posted by: Eclectic | Jul 6, 2007 8:25:42 AM