Saturday, August 2, 2014

More Jobs--What About Incomes?

Popular Economics Weekly

The U.S. in July added 209,000 jobs last month outside the farm sector, the Labor Department said Friday. Although hiring tapered off after a 298,000 gain in June, the U.S. has generated at least 200,000 jobs in six straight months for the first time since 1997. Every major sector of the economy added jobs and hiring was particularly strong in the professional ranks, construction and manufacturing — all sectors that pay above the average national wage.


Graph: Marketwatch

The unemployment rate, meanwhile, rose slightly to 6.2 percent from 6.1 percent despite another strong month of hiring, according to government data . More people entered the labor force in search of work to push the rate higher, but that’s usually a good thing. It typically a sign that people think more jobs are available.

But yesterday, a second quarter report on rising employee wages and salaries (April to June 2014) called the Employment Cost Index (ECI) caused a big stock market selloff, even though costs rose just 2 percent, as they had since 2012, really. Why? Because traders and investors conjectured that rising wage costs might raise inflation fears, and therefore the Fed could raise short term interest rates earlier than next year.

But most forecasters see absolutely no hint of looming inflation, including Marketwatch’s Jeffry Bartash. In fact, stagnant wages are acting as a brake on the economy and preventing it from growing much faster, he says, which is keeping inflation low. The U.S. has averaged 2 percent wage growth since 2011, well below its historic 3.2 percent average. Without fatter increases in wages, the economy is unlikely expand more rapidly.


Graph: MarketWatch

“In July, average hourly wages showed almost no change,” said Bartash. “They rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9 percent to 2.2 percent – one-third less than usual during an economic recovery.”

Then we have Wednesday’s release of the last FOMC meeting minutes that show the Fed is on the right track in maintaining low interest rates. Though growth is increasing and there are hints of higher inflationary tendencies, there is still “significant underutilization of labor resources,” said the Governors. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The question is how long will the Fed allow some inflation before putting on the credit brakes by raising interest rates? In fact, the bottom line is that there is no inflation, if wages can only rise as fast as inflation, since that effectively nullifies the wage increases. The Fed says they might wait until summer 2015 before initiating any raises. If done prematurely, it will shorten this recovery, as has happened in past recoveries.

Harlan Green © 2014

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