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Available labor limited but wage traction still elusive
Simply Economics - November 3, 2017
By Mark Pender, Senior Editor


Simply Economics will be taking a week's break. Next posting will be November 17, 2017.



A personnel change is in store for the Federal Reserve but the economic picture is unchanged as a declining supply of labor, in the face of strong demand, has yet to trigger consistent signals of wage pressure. Jerome Powell, considered a policy moderate, is President Trump's choice to chair the Fed and he will be taking over at a time when policy hawks have to be uneasy wondering when wage-push inflation will burst higher. In this week's article we'll look at how low labor supply really is and whether prior glimpses of wage pressure may reappear.


The economy

Payrolls easily weathered the season's hurricane disruptions, rising 261,000 in October following an 18,000 rise in September for a resilient monthly average of 139,500. The swing factor between the two months is restaurants where payrolls jumped 89,000 after plunging 98,000 during September's storms. Professional business services underscore how urgent demand for labor is, rising 50,000 in October with the temporary help component up 18,000 for the strongest rise of the year.


But job growth is being drawn against a dwindling supply of labor. Those actively looking for work fell nearly 300,000 to 6.520 million for an unemployment rate of 4.1 percent, the lowest in 17 years. When also including those not actively looking but wanting a job, the number moves to only 11.750 million which is a 10-year low. The return of discouraged workers may have run its course as the participation rate fell a steep 4 tenths to 62.7 percent, suggesting those who wanted to come back may already be back.


The laws of economics are clear. The more scarce workers become, the greater the wages that employers will have to pay to fill positions. But this law has been in abeyance during the expansion though definite hints of it appeared in both July and September when average hourly earnings, which are also part of the employment report, posted expansion highs. But October's result was fractionally negative as seen in the graph and moves the monthly trendline from slightly higher to roughly flat.


The year-on-year trend for wages is likewise flat after September's 2.8 percent rate faded to 2.4 percent in October for the lowest result since February 2016. Wage inflation is a pivotal swing factor and its lack of acceleration won't be passing through to overall prices. The graph tracks wages against the core PCE index which is the Fed's main inflation gauge, one that keeps trending lower. This will encourage policy doves at the Fed, those more concerned about jobs than inflation, to go easy on stimulus withdrawal.


But another Fed favorite is the employment cost index (ECI) which looks at wage pressures from the perspective of the employer. The ECI supports policy hawks with the yearly rate rising to 2.5 percent in the third quarter for its hottest showing since first-quarter 2015. If wage inflation finally does erupt, the ECI together with the September and July showings for average hourly earnings will have offered the first evidence. The ECI tracks wages and benefits with both balanced at roughly 2.5 percent.


To widen our wage look let's turn to the most inclusive indication on income which is personal income. This includes wages and benefits and also income from other sources including rent and financial transactions. Yearly growth, at 3 percent in September, has been struggling the past several years and has been below spending for nearly 2 years straight. If income keeps lagging, spending would appear certain to slow. Yet if income suddenly jumps, then spending could get an overheated boost.


And there is one hint of possible overheating ahead, that is an upward privot for manufacturing which is considered the economy's bellwether sector. Manufacturing payrolls have been rising strongly in recent months and though yearly growth is still limited, at 1.3 percent in October, the trend is up. A bellwether for manuafcturing payrolls is unfiilled factory orders which, though up only a yearly 1.4 percent, are also climbing. Given recent strength for new factory orders, backlog accumulation seems assured.


Emerging acceleration for the factory sector is key right now for the economy, acceleration that has been signaled very strongly and far in advance by the ISM report. This report has been at expansion highs including its production index which, however, has not tracked well with actual production, at least not yet. But October's employment report included major gains in factory hours that point to a big gain for October production. The pieces are in place for a major upswing across all factory data.


The strongest of all economic signals comes from jobless claims which are at 44-year lows and consistent with full employment. But there's a wildcard as Puerto Rico, which unlike payroll data is included in the claims report, begins to turn higher. Disruptions from Hurricane Maria had delayed filings but they're coming in now, up nearly 2,750 in the latest week to more than 6,100. How much higher they go is anyone's guess. But what may hint at a fast peak are claims from the Virgin Islands which have already leveled out.


Markets: The Dow as a confidence measure

Jobs market strength has been fueling this year's big run for consumer confidence. But having a job isn't the only thing boosting confidence. The stock market's great run this year, up 19.1 percent year-to-date for the Dow, has also been a key factor. Confidence and the Dow track very closely suggesting that the Dow is in fact a handy confidence gauge. But not all signals from the financial markets are pointing to acceleration as the 10-year Treasury yield, at 2.35 percent, is down, not up, on the year.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 27-Oct-17 3-Nov-17 Change Change
DJIA 19,762.60 23,434.19 23,539.19 19.1% 0.4%
S&P 500 2,238.83 2,581.07 2,587.84 15.6% 0.3%
Nasdaq Composite 5,383.12 6,701.26 6,764.44 25.7% 0.9%
Crude Oil, WTI ($/barrel) $53.71 $54.02 $55.70 3.7% 3.1%
Gold (COMEX) ($/ounce) $1,152.50 $1,273.70 $1,270.60 10.2% -0.2%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.59% 1.62% 41 bp 3 bp
10-Year Treasury Yield 2.45% 2.42% 2.33% –12 bp –9 bp
Dollar Index 102.26 95.01 94.94 -7.2% 0.6%


The bottom line

In the 4 years of leadership under Janet Yellen, the unemployment rate has moved from nearly 7 percent to a generational low of just over 4 percent. Her support to bring in workers who grew discouraged after the Great Recession may now have run its full course given the bare bone levels of workers that are now available. Though wages have yet to turn decidedly higher, the risk of wage inflation is here which may make for a tangibly hawkish turn in the post-Yellen Fed.


Week of November 6 to November 10

It's a very light week for the economic calendar. JOLTS data on Tuesday will update job openings which have been far exceeding hirings in strong evidence that the economy is at full employment. Jobless claims will offer the first November update on the jobs market and whether hurricane effects have completely unwound. Rounding out the week is consumer sentiment which, reflecting the strength of the labor market, is coming off a 13-year high.




Small Business Optimism Index for October

Consensus Forecast: 105.0

Consensus Range: 103.5 to 105.7


The small business optimism index has been at expansion highs though September did see some cooling, to 103.0 for the lowest reading of the year. Sales expectations and business plans showed the most weakness. Econoday's call for October is a bounce back to 105.0.


JOLTS: Job Openings for September

Consensus Forecast: 6.082 million

Consensus Range: 6.050 to 6.125 million


At 4.1 percent, the unemployment rate is low and consistent with full employment which is also the signal from the JOLTS report where job openings have been running over 6 million and nearly matching the number of unemployed actively looking for work. Econoday's consensus for September job openings is 6.082 million.


Consumer Credit for September

Consensus Forecast: $17.4 billion

Consensus Range: $16.1 to $22.5 billion


Revolving credit has been increasing this year raising talk of slackening standards in the credit card industry. Boosted by revolving credit, consumer credit rose $13.1 billion in August with forecasters looking for $17.4 billion in September.




Initial Jobless Claims for November 5 week

Consensus Forecast: 232,000

Consensus Range: 229,000 to 242,000


Initial claims are expected to come in at 232,000 in the November 5 week vs 233,000 in the October 28 week. Hurricane-related claims from Puerto Rico are still a wildcard.


Wholesale Inventories for September

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.3%


Wholesale trade inventories are expected to rise 0.3 percent which is right in line with September's advance reading. Wholesalers have been building their inventories aggressively with 0.9 percent and 0.6 percent builds in the prior two reports.




Consumer Sentiment Index, Preliminary November

Consensus Forecast: 100.0

Consensus Range: 97.0 to 102.0


Underpinned by high employment and rising income prospects, the consumer sentiment index jumped in the preliminary October report to 101.1 for the best showing in 13 years before ending the month nearly as high, at 100.7. Econoday's consensus for preliminary November is 100.0.


Treasury Budget for October

Consensus Forecast: -$56.1 billion

Consensus Range: -72.0$ to -$48.0 billion


The Treasury ended fiscal 2017 with a $665.7 deficit and a 13.7 percent increase from fiscal 2016. October's budget starts off fiscal 2018 with a $56.1 deficit the expectation.


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