Picking Up the Slack — Or Is It Too Late?
As the countdown to Friday’s jobs number begins, it might be instructive to get yet another perspective on the amount of slack in the labor market and its effect on wages.
Here’s a chart built at the St. Louis Fed website that clearly drives home the point — it perfectly captures the inverse relationship between the Unemployment Rate and Average Hourly Earnings:
Unemployment and Average Hourly Wages: Mind the Gap
>
I’d postulate that only when this gap starts to close meaningfully will we have to consider the possibility that the Fed will tighten and/or that inflation might be somewhere out there on the horizon. Until then, it’s very hard to envision they’ll consider moving off their ZIRP.
Additionally, there was much fanfare when ISM printed at an above-consensus 58.4. And certainly it’s good to have expansion in the manufacturing sector, to be sure. But we’re starting to get data points (like ISM) that are really more late-cycle than they are early-cycle. And the jobs market — admittedly a lagging indicator — is simply taking too long to play catch up. Here’s the ISM (Index, LHS) and Nonfarm Payrolls (YoY Pct. Change, RHS). I’ve adjusted payrolls by three months to clearly show the correlation and account for the lag. Is it too late to see a jobs recovery that’s going to even put a dent in the damage that’s been done over the past 25 months? That is the question.
ISM: How much better will it get?
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February 3rd, 2010 at 11:35 am
Would you like a waffle cone with that double dip?
February 3rd, 2010 at 11:55 am
What’s up with the revisions to the February 5 Employment Situation release?
http://www.bls.gov/bls/upcoming_empsit_changes.htm
http://www.bls.gov/bls/empsit_crosswalk.htm
You weren’t expecting to actually be able to understand the Friday employment release, were you, Barry? :-)
February 3rd, 2010 at 12:05 pm
can someone please point me to some legitimate research that shows ZIRP actually encourages employment? it surely doesn’t encourage capital accumulation at 0.01%. it might seem to encourage capital investment which would offset employment.
or maybe i am just another pissed off saver thru this whole boom-bust-boomlet period.
February 3rd, 2010 at 12:11 pm
Invictus says: “I’d postulate that only when this gap starts to close meaningfully will we have to consider the possibility that the Fed will tighten and/or that inflation might be somewhere out there on the horizon. Until then, it’s very hard to envision they’ll consider moving off their ZIRP”
I agree. Payrolls can typically run 70% of total costs for many companies, particularly in services. It is difficult to envision a scenario where inflation gets out of hand while the forces of supply and demand are keeping labor costs from rising. Which should be for an extended period of time.
this scenario is likely part of the adjustment process in a global economy. Wages will not keep up with other costs for many years until our trade balances and payment balances have equalized (or perhaps gone in the other direction in order to pay off our debts).
Not nice if you are an American worker, but a reality never the less.
February 3rd, 2010 at 12:14 pm
dan,
ZIRP is for banks, ZIP is for unemployment.
February 3rd, 2010 at 12:21 pm
Charts just confirm most people’s, working people’s, anecdotal observations. We’ve outsourced ourselves right out of the job market. We expect our goods and services (like LCD Tv’s :D) to get cheaper and cheaper, yet we all want our wages to be higher.
Hmmmmm…Can’t get paid more for the things you make if your neighbor wants to spend less on it.
February 3rd, 2010 at 12:31 pm
if people would just spend more- then businesses would hire more
problem solved-
this stuff’s easy- and remember- unemployment is a lagging indicator- so irrelevant- in 20 years or so- they’ll all be back to work retired or dead
February 3rd, 2010 at 12:32 pm
you can put up as many charts and speculate all you want about what the gov or Fed is going to do but the fact of the matter is simply this….
30% of US workforce are already temps, contractors, consultants, part time workers etc that has resulted in:
• The elimination of benefits. A complete shift of risk to individuals. Costs are rising fast (often many, many times the rate of core inflation) and one slip puts you into bankruptcy.
• Record levels of job dissatisfaction (waiting for the next great project never happens on your schedule).
• Stagnation or a steady erosion of income at best (many see an immediate drop in income or long periods of unemployment between gigs with a shift to temporary status) due to pressure from off-shoring and automation.
Net Net:
1950′s to 2005 – increasing prosperity for most Americans ( since the 1980′s mostly due to asset bubbles primarily real estate )
2005 to ? – decreasing prosperity for more and more Americans ( translates into lower standard of living )
The US economy can no longer be driven by consumer spending, asset bubbles, ponzi schemes or Financial capitalism which doesn’t generate any real value for the rest of the economy.
February 3rd, 2010 at 12:57 pm
What?
Doesnt that chart show the unemployment rate routinely and consistently dropping (and fast) about 12 months after the end of the recession?
Why is this playbook any different?
R-E-C-O-V-E-R-Y… its looked really easy since leading indicators turned in April 09. Looks the same today, gradual building of economic strength in all the right (and typical) ways.
February 3rd, 2010 at 1:06 pm
That said, I agree with BR — “Fed will not move until slack gap closes”. This will continue to be good for corporate assets and really all asset prices.
I disagree with BR — “jobs market is taking too long to play catch-up”. By the look of the last 2 recoveries and the chart. Jobs market will only show its hand in Q3/Q4 2010.
Interesting survey from Institutional Investor which said, “% of investors expecting a correction are at highest levels since April 1984″. From April 1984 market was up 20% 1-yr later and 50% 2-yrs later. Situation looks broadly similar. (Also, SPX was at 160 pts in April 1984. You still waiting to buy it there?)
February 3rd, 2010 at 1:22 pm
Target Employee Says 8K Full Timers Will Be Part-Time
Apparently the email went on to say that HR will receive another email within 3-4 months directing stores to reduce current specialist hours to below 32 hours a week. Reason being the company wants to get all the current specs in the company OFF the full time benefits plans to reduce cost. (i.e. health insurance, etc)
http://consumerist.com/2010/02/target-employee-says-8k-full-timers-willl-be-part-time.html
February 3rd, 2010 at 1:38 pm
cognos-
who picks up the labor slack? what businesses are going to start hiring? Is that relevant? who steps in when the USG steps out on housing come 3/31 and 4/30? do you believe the USG should BE the mortgage market and support housing price? If so- is that the USG’s function? and also- why shouldn’t true price discovery be allowed? How long should savers suffer @ zero interest? or is that irrelevant? are the GSE’s able to withstand another housing shock? should they be brought on the USG’s books since they have been effectively nationalized? do you see ZIRP and QE as typical responses by an economy that is fundamentally strong? Is it irrelevant?
my impression is that you are a supposed “free market” supporter who is more than happy with any government support in all aspects of the economy forever- regardless of how it distorts the “real” market and how it effects people who live in fixed incomes and who rely on their savings for survival-
prove me wrong
February 3rd, 2010 at 1:39 pm
Inflation is not caused by changes in supply and demand metrics, whether for labor, or anything else. Inflation is everywhere and always a monetary phenomenon.
That said, high unemployment in the US is the result of international wage arbitrage that could no longer be forestalled by monetary hijinks. The trip wire was the residential real estate/financial crisis, caused by those same monetary hijinks. Wages in the US have to decrease to reach something close to parity with our trading partners before employment rolls will sustainably increase. Whether that decrease comes through inflating away the purchasing power of an hour of labor, or through actual decreases in wage rates, matters little. When the going wage in America is roughly equivalent to that of a Chinese peasant, real wages and unemployment, will have reached their nadir. Then we can make our own widgets in our own factories.
February 3rd, 2010 at 1:50 pm
@Curmudgeon: But I would add that if said wages have to go down, then so do prices for goods, services and assets (namely, things like real estate). This is what the feds are trying to avoid at all costs, because asset price deflation actually hits the elite (the asset owners) and gov’t entities the hardest. The asset owners (our banking elite) need to keep prices up at all costs, so our economy will continue to stagnate at this lower level (if we’re lucky) for likely a long, long time, as we pretend that this vast misallocation of capital isn’t happening.
February 3rd, 2010 at 1:50 pm
Do you see ZIRP and QE as typical responses by an economy that is fundamentally strong?
Ahab, kudos man. Frame that question and hang it up. That is the ball we all need to keep our eyes on, stated very succinctly. Kind of like: how many healthy people are getting chemo/radiation treatments. Awesome.
February 3rd, 2010 at 1:53 pm
Agreed, Transor. Well done, ahab. Long live ZIRP and QE!
The markets are obviously not a true barometer of the real underlying economy’s health.
February 3rd, 2010 at 1:55 pm
@Cognos:
Note that in the second graph I shifted employment by three months to maximize the correlation and account for the lag. Having done that, you’ll note that employment lagged even beyond what I’d accounted for in the 1990 and 2001 recessions. This recession is deeper, and longer, than either of those. And the gap, or slack, in both charts is greater.
Ahab asks the right question: “Who picks up the labor slack?” Where is the hiring going to come from? This is the question that continues to confound me.
February 3rd, 2010 at 1:56 pm
Hourly wage growth must never exceed CPI, otherwise hourly workers can accumulate wealth.
and
[In the absence of easy credit] the US economy can no longer be driven [solely] by consumer spending, asset bubbles…
km4, I hope your not suggesting people strive to create real value in a system desiged to be gamed at every opportunity. I mean, you’d have to be a little crazy to make that your goal in life.
Someday we’ll figure out a better way to equitably distribute wealth. :P
February 3rd, 2010 at 1:58 pm
@Invictus: And nobody, not even bulls like cognos, can ever answer that very question.
Also, I may be wrong, but hasn’t housing always led us out of recessions in the past? If not this time, then what will lead us out? ZIRP, fed stimulus, and QE ad infinitum? I don’t think so.
So, to me, unless the employment and real estate picture turn around, there will be no real recovery. It will be dubbed thee “Recoveryless Recovery”.
February 3rd, 2010 at 2:02 pm
The Fed will leave interest rates close to zero unless the bond vigilantes come back from the dead.
The US economy can’t exist with home mortgage rates above 7% at this point.
The government needs ZIRP to try to force all the money the proles have safely stashed away out to where it can be stolen by Wall Street/Housing Market etc.
The government will keep trying to pass Amnesty for millions of illegals to put the final nail in the coffin for Joe Six Pack.
It is anyones guess as to which currency goes Weimar first, Yen, Euro, or Dollar.
It seems GDP includes accrued interest on credit cards etc. that will never be paid back.
I don’t know if they subtract credit write offs from GDP when that happens.
February 3rd, 2010 at 2:06 pm
Seeing that gray bar stop short of the present is bugging the crap out of me. Invictus, sorry I missed you as author again. Seriously, maybe you should come up with a trademark lead-in or tagline or something. Because if it’s charts and interesting analysis, we all assume it’s Barry — especially if we don’t read so good! :-)
February 3rd, 2010 at 2:13 pm
@TZ
Maybe a photo would work as an identifier…I’m much, much more handsome than Barry.
February 3rd, 2010 at 2:20 pm
Strictly ad hominem, but this January appeared to be a pickup in the construction industry (private) in tandem with the Recovery Act government and union ‘preserve and protect’ job surge, but as I was able to drill down and apply to management rather than HR, and interview responses that I got, (few) they are all saying (uniformly), well over 1,000 applicants for construction consulting jobs, and they’re just building their resume base in case there is spillover from Recovery, right now NOTHING ON THE PRIVATE SIDE.
And January is traditionally the hiring month anyway, so the apparent increase is probably an increase YOY from January 2009 right in the midst of the bloodbath, but a huge decrease from 2008 and earlier.
And you’re going to see ‘pain and suffering’ on the state and local government level RIF out employees.
We are all American Idol wannabes now.
February 3rd, 2010 at 2:21 pm
@ Transor Z
If NBER says it’s safe to surf this beach, then it’s safe to surf this beach!
February 3rd, 2010 at 2:24 pm
Invictus-
. . .and that’s hard?
and so BR does not get offended-
in the words of Triumph the Insult Comic Dog- “I kid, I kid”
February 3rd, 2010 at 2:28 pm
I wonder of Invictus has a go-to purple tie for media occasions.
February 3rd, 2010 at 2:31 pm
@ Transor Z
If NBER says it’s safe to surf this beach, then it’s safe to surf this beach!
————-
Simply awesome comment.
February 3rd, 2010 at 2:35 pm
I’m much, much more handsome than Barry.
Hey, I don’t want you to get the wrong idea, man. I’m already married. :-)
February 3rd, 2010 at 2:52 pm
@TZ
As am I, TZ. We all have our cross to bear. Six happy years for me; fourteen overall. ;-)
February 3rd, 2010 at 3:21 pm
@ Invictus… in the first graph. It looks like unemployment peaks 1 to 1.5 yrs AFTER the grey recession bar. Right? We’re not close to there yet in the current timeline. Why doesnt this time look exactly the same?
Second graph also looks similar, except amplitude.
@ ahab — YES! ZIRP and QE are problems of wealthy societies. Japan is wealthy. We are wealthy. Europe is wealthy. Poor countries have less stability, more inflation, and higher interest rates. I dont think we’ll have the Japan-problem (bc of cultural differences and bc we did not have simultaneous stock and RE bubbles). But the dynamics have similarities and are predominantly deflation driven.
Labor slack will get taken up as nominal growth returns. Recovery is a natural part of the cycle. Old bubbles tend to have long deflating tails (internet, RE, commodities). New bubbles get blown in areas of opportunity (clean tech, energy tech, consumer goods, mobile media, ??? etc). Its hard to say, its worth $B to speculators to know… what will get hot?
The capitalist democracy is very good at problem solving and wealth creation. I dont think that’s changed.
February 3rd, 2010 at 3:31 pm
@Cognos
I think there are many reasons this time will not be exactly the same (much as I really do hate to say “It’s different this time.”).
Here is my Exhibit A — our Debt/Income ratio, which hit ~140 percent. I’ve got Exhibits B, C, D, etc., etc., but suffice to say we are in a massive credit deleveraging cycle that is foreign to any of us who aren’t ~100 years old.
February 3rd, 2010 at 3:34 pm
@km4 and jjay: If stagflation is the best we can hope for, I shudder to contemplate the likely effects upon the politics of this country.
February 3rd, 2010 at 3:35 pm
I got about 2 out of 19 that were happy, or is that not what you were talking about?
February 3rd, 2010 at 3:39 pm
@Curmudgeon
Yes, we’re talking Happy Years of Marriage/Years of Marriage. I’m guessing most would be happy if they’re batting 0.500, but that really is just a guess. Sorry to hear you’re below the Mendoza line. :-(
February 3rd, 2010 at 3:43 pm
@Invictus…yeah, what’s worse, it was the first two:)
February 3rd, 2010 at 3:46 pm
@Invictus:
OK, you have your next assignment:
“Frequency of blog commentary as indicator of marital satisfaction”
or
I’m thinking the chart would look an awful lot like the top chart (comment freq in blue)…
February 3rd, 2010 at 3:51 pm
Hopefully, recovery will happen and the unemployment rate will decrease.
February 3rd, 2010 at 4:06 pm
cognos says-
“I dont think we’ll have the Japan-problem (bc of cultural differences and bc we did not have simultaneous stock and RE bubbles). ”
I guess Dow 14,000 was just about right on valuation then? all predicated on an economy sucking on the fumes of a RE boom-
dude- you have ZERO credibility w/ me
February 3rd, 2010 at 4:25 pm
I just found this little essay by William Gavin at the St. Louis Fed site, published just yesterday:
Are Low Interest Rates Good for Consumers?
http://research.stlouisfed.org/publications/es/10/ES1003.pdf
It is true that credit card debt was reduced slightly at the ends of some previous recessions, but that was not the case in 2001 and the current reduction is the largest since the Fed began collecting such data (in the early 1950s).
Gavin’s Conclusion:
The economy is currently in the worst recession since World War II. Conventional macroeconomic wisdom suggests that low interest rates will aid in the recovery by restoring health to the banking system and promoting lending to both businesses and households. So, if low interest rates are indeed good for consumers, then the benefits must come from the effect these policies have on future output growth.
The unstated point here is that, when you’re in debt, deleveraging IS savings, especially when the spreads are still so freaking high. It’s a no-brainer choice for households.
February 3rd, 2010 at 4:53 pm
@soloduff Says February 3rd, 2010 at 3:34 pm
km4 and jjay: If stagflation is the best we can hope for, I shudder to contemplate the likely effects upon the politics of this country.
A good way for a populist 3rd party to come to power and minimize the rotten and corrupt to the core Dem and GOP parties…..won’t be easy but beats the crony, corporate, gangster capitalism that we have today.
Cloud Culture and “cloud capitalism”
http://www.counterpoint-online.org/cloud-culture-promise-and-danger/
disclosure: I consult with software startups who are doing “cloud capitalism”
February 3rd, 2010 at 7:34 pm
@ Invictus — I notice you didnt respond to my points about the charts looking just like prior recoveries? Also, debt/income may look a bit higher… what about (debt service) / income? This would be far lower than 1980-level… and the recovery from there produced a nice long boom.
Debt is a function of savings. (One man’s savings is another’s debt… right?)
@ Ahab — Clearly the 1999 stock bubble was a bubble, while 2007 levels just corrected with recession. The financial crisis was mortgage credit driven. Stock indices x-financials are not down that much, maybe 10-15%. X-financials and Commodities and they may be flat. Its hard to call general stocks a bubble when they were flat on the previous 10-yrs… right? The 2000-07 bubble was housing and commodities. My point is… we’re fortunate we had the internet bubble at a different time then weak-dollar, demographics, etc caused RE bubble. Japan can be understood as having both the BIG stock bubble (US 1999) and the big RE bubble (US 2007) at the same time. Much tougher to recover from the deflation effects of both.
February 3rd, 2010 at 8:34 pm
One of the reasons hiring has not increased while corporations earn more is that smart people are in short supply. The recession, decession, depression, whatever you want to call it has given employers the the excuse to not hire. They know very well that the 20-80 or 30-70 rule applies.
See Jobs statement on his A4 chip. He wants people who are ten times the value of the “ordinary” chip designer.
The dumb factor needs to be plugged into the employment. We do not have enough smart people.
February 8th, 2010 at 1:01 am
[...] This chart “perfectly captures the inverse relationship between the Unemployment Rate and Average Hourly Earnings.” (Source: The Big Picture) [...]
February 10th, 2010 at 2:03 am
[...] 失業率與平均時薪,圖示剛好成反比向。 從圖中可以預計柏南克退市尚要等兩者由背馳變成拉近。 留言 [...]