Posts filed under “Employment”
Lakshman Achuthan is co-founder and managing director of the Economic Cycle Research Institute (ECRI), an independent organization focused on business cycle analysis and forecasting in the tradition established by ECRI’s co-founder, Geoffrey H. Moore. ECRI maintains business cycle chronologies for 20 countries around the world other than the U.S. Lakshman is the managing editor of ECRI’s forecasting publications and regularly participates in a wide range of public economic discussions.
He is a member of Time magazine’s board of economists, the New York City Economic Advisory Panel and serves as trustee on a number of non-profit boards. Lakshman is the co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.
Earnings growth has risen for an unwelcome reason – because growth in hours has fallen faster than pay growth. As bad as that is for income growth, it’s also not a credible signal of an inflation upturn.
In the context of the ongoing taper, the Fed, like most other observers, remains optimistic about economic prospects. In turn, a number of economists have been focusing on “bullish” indicators of employment and inflation.
In particular, some of them think the rise in average hourly earnings (AHE) growth for nonsupervisory workers since 2012 implies less labor market slack. So, is the rise in AHE growth actually indicative of strengthening labor-market fundamentals, particularly inflationary pressures? We turn to our cyclical framework for answers.
For the private sector, year-over-year (yoy) growth in AHE has indeed risen noticeably since 2012. Since AHE is the ratio of total weekly pay to total weekly hours, it helps to look at the growth rates of each, shown in the lower panel of the first chart (purple and gold lines, respectively). From this perspective, the real story emerges. The yoy growth rates of both pay and hours have actually been declining since early 2012, but hours growth has fallen faster than pay growth. So, while rising AHE growth may seem like a good thing, in this case it’s actually driven by downturns in its components.
Increasing AHE growth may stem from underlying strengthening of hours and pay growth, or from a technicality, where both are actually falling. The latter is what we’ve been seeing in the current cycle, so the recent advance in AHE growth is no sign of strength. It doesn’t really point to a healing in the labor market, or necessarily imply a welcome rise in inflation, as some claim. Indeed, a broader measure of AHE growth – for supervisory and nonsupervisory workers – has actually been easing since last fall, and dropped to a 13-month low in April.
In any case, it’s risky to presume, based on AHE, that policy action has effectively achieved its goals of boosting inflation and healing the labor market. This is even more troubling in the context of the “yo-yo years” environment of weakening trend growth and more frequent recessions than most expect.
On a related note, we’ve seen much hand-wringing – and no little schadenfreude – about the Eurozone’s risk of “becoming Japan,” with yoy growth in its Harmonized CPI (HCPI) dipping in March to 0.5% before ticking up to 0.7% in April – still well below its 2% target. The U.S., of course, is generally considered to be in no such danger.
Yet, an apples-to-apples comparison – on the same HCPI metric – shows the U.S. (second chart, dark blue line) and the Eurozone (light blue line) to have been on virtually identical inflation tracks, with only a slightly smoother downward trajectory for Eurozone inflation. Indeed, U.S. inflation was lower than Eurozone inflation for 16 of the 19 months from April 2012 to October 2013, and virtually identical in February 2014, when HCPI growth was actually lower in the U.S. than in Germany or France.
Thus, contrary to popular belief, “lowflation” hasn’t been less of a reality in the U.S. than in the Eurozone. Additionally, the recent rise in Japanese HCPI growth to its highest reading since 2008 (red line) doesn’t necessarily signal a structural shift out of its third lost decade. And even if we see cyclical upturns in U.S. or Eurozone inflation in the months ahead, they wouldn’t imply monetary policy success, or the widely expected attainment of “escape velocity.”
So the U.S. isn’t all that different from other major developed economies, and ECRI’s analysis shows why the jubilation about rising wage growth in some quarters is premature, to say the least. Wishful thinking aside, we’re far from breaking out of a long-term pattern of falling trend growth, and the lingering lowflation that’s one of its symptoms, in the U.S. as in other major economies.
May 5, 2014 The Media’s Reporting of the April Unemployment Rate – A Little Knowledge Can Be Dangerous Economists have “trained” the media to quickly check out what has happened to the labor force when the unemployment rate declines. If the unemployment rate drops and so, too, does the labor force, then the decline in…Read More
I love this set of headlines from Neil Irwin: Source: NY Times We have spent a lot of columns arguing that NFP should be mostly ignored by traders, but Irwin does a masterful job showing the varied responses the BLS model creates to what is eesentially the same exact data. Be sure to see…Read More
I thoroughly enjoy the regular polls that Gallup releases. I am aware of all the flaws and pitfalls of these surveys. Indeed, each new sample provides an opportunity to sharpen one’s statistical cynicism. Sometimes, however, they offer insights into specific aspects of the American psyche, helping to clarify my thinking about societal, economic and market…Read More
Source: National Employment Law Project I really like this bubble chart. I saw it last night in a report from the National Employment Law Project titled: “The Low-Wage Recovery: Industry Employment and Wages Four Years into the Recovery.” Interestingly, the data has provoked opposing reactions from two media outlets. The Washington Post’s Wonkblog used…Read More
click for larger graphic Source: Calculated Risk Have a look at the chart above, via Calculated Risk. It aligns the depths of all eleven post WW2 recessions, showing how long it took them to recover all of the jobs lost. The outlier is the 2007-09 contraction, which according to the chart above, is…Read More
While I have been busy kvetching about the weather, another payrolls report has snuck up on us. Estimates are for a 200,000 increase in nonfarm payrolls, the most since November, according to the median forecast of 90 economists surveyed by Bloomberg. But really, I have to ask: Why do you care? As I have relentlessly…Read More
What the Federal Reserve is Doing to Promote a Stronger Job Market Chair Janet L. Yellen At the 2014 National Interagency Community Reinvestment Conference, Chicago, Illinois March 31, 2014 I am here today to talk about what the Federal Reserve is doing to help our nation recover from the financial crisis and the…Read More