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NFP: Watch the Comp

Posted By Barry Ritholtz On December 8, 2006 @ 7:40 am In Economy,Employment,Federal Reserve,Wages & Income | Comments Disabled

Last month, we retired the Over/Under bet [1]. The monthly and annual BLS revisions have conspired to make the initial numbers all but worthless. As an economic indicator, the monthly NFP data is wanting (Household Survey is worth even less). If we take these revisions at face value, the initial number is so unreliable by such a large factor as to be meaningless noise.

The initial BLS data’s does retain some merit, however, in that it is now a form of entertainment. Perhaps the Bureau [2] should consider releasing the reports on YouTube [3].

Since we brought up these revisions, let’s review some recent payroll data revisions you may overlooked: revision to Compensation. There has been much said about the uptick in income and wages over the past few months. My pal Larry [4] has been all over it; So too, has the White House been lauding the acceleration [5] in compensation growth.

Such rejoicing was premature. The most recent update to the second quarter real compensation data was a dramatic downward revision.

Haver Analytics [6] gives us the details:

"Compensation per hour, however, was revised sharply with the 3Q estimate taken down one percentage point to 2.6% growth. Combined with a huge downward revision to 2Q growth to -1.2% from +6.6% (not a typo) it lowered the y/y change to 4.3% which is on a par with the growth during the last several years.

The revisions to compensation lowered unit labor costs sharply as well to 2.3% growth last quarter. Growth during 2Q was lowered to -2.4% versus a previously estimated 5.4% gain. During the last thirty years there has been an 85% correlation between labor cost growth the growth in the GDP chain price deflator, although that correlation has fallen sharply in recent years."

Despite what you have heard, there is very little wage pressure throughout most of the system. Select, high paying jobs that require highly educated workers have wage pressure. Most of therest of the labor market does not. Kids, that’s a lesson worth learning: Don’t just stay in school, but keep adding letters after your name – Grad School is the new college.

The Fed is thought to be closely watching the comp portion of NFP closely. The chatter has been that there is a tight labor market, and wage pressures are rising. The Fed has been jawboning about inflation pressures, and has been using the wage increase as an example of why they might tighten.

It turns out this is utter nonsense. Excepting for a very specific cross section of technical jobs that there is a shortage of qualified workers for, labor remains both cheap and plentiful in the U.S. Its also apparent that Global Outsourcing has reintroduced a competitive pricing factors into the US Labor Market.

Have a gander at these charts: Labor costs remain muted, and Real Compensation is soft:


061205bjpg [7]

Courtesy of Haver Analytics

Real_comp [8]
Courtesy of Professor Menzie Chinn, University of Wisconsin



Bottom line: The Fed will supposedly be watching the NFP for signs of a tight labor market and economic re-acceleration. The Smart Money is waiting for a more accurate picture after the inevitable revisions.

Of course, that won’t stop the report from being market moving short term.  Traders are advised to be aware of what is to follow . . .


UPDATE: December 8, 2006, 9:50am

Numbers are out:

Nonfarm payroll employment [9] rose by 132,000 in November; Unemployment
Rate was essentially unchanged at 4.5 percent. Gains came primarily in services, health care and retail. Employment declined in construction and manufacturing.

Surprise! Hourly earnings growth slowed. So much for the supposedly tight labor markets.


U.S. Productivity Little Revised, Compensation Lowered Sharply [6]
Tom Moeller
Haver, December 5, 2006

Compensation Catch-up Postponed [10]
Menzie Chinn
Econbrowser, December 07, 2006

Establishment DATA
BLS, Friday, December 8, 2006

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/12/nfp-watch-the-comp/

URLs in this post:

[1] retired the Over/Under bet: http://bigpicture.typepad.com/comments/2006/11/nfp_retiring_th.html

[2] Bureau: http://www.bls.gov/schedule/archives/empsit_nr.htm

[3] YouTube: http://www.youtube.com/

[4] Larry: http://www.kudlowsmoneypolitics.blogspot.com/

[5] lauding the acceleration: http://www.whitehouse.gov/cea/lazear20060912.html

[6] Haver Analytics: http://www.haver.com/COMMENT/061205a.htm

[7] Image: http://bigpicture.typepad.com/photos/uncategorized/061205bjpg.jpg

[8] Image: http://bigpicture.typepad.com/photos/uncategorized/real_comp.png

[9] Nonfarm payroll employment: http://www.bls.gov/news.release/empsit.nr0.htm

[10] Compensation Catch-up Postponed: http://www.econbrowser.com/archives/2006/12/convergence_del.html

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