From Torsten Sløk:
When discussing whether the current uptrend in wages will continue, it is important to look at the group of people who are not working and whether individuals in this group will be coming back to the labor market and hold wages down. The first chart below shows that a significant part of the young people who are not working are in school. For the older age categories, a significant number of individuals are retired. It is also noteworthy that a significant amount of people in their 40s and 50s are not working because they are disabled or ill or taking care of their family. From a Fed perspective, the key question is if any of the groups shown in the chart will be coming back to the labor market and thereby hold down the uptrend we currently are seeing in wages. Young people who are studying will obviously enter the labor market eventually but for the other groups the propensity to return to employment is more uncertain. The bottom line is that wages are already trending higher and the unemployment rate is relatively low at 5.0%, so if these groups wanted to come back then we should already have seen a solid increase in labor force participation. Given this has not happened, the conclusion is that the economy is probably closer to full employment than rates markets seem to believe.
But wages are not consumer prices. So what is the broader evidence that the economy is getting closer to full capacity? If you remove the more volatile components of inflation (gas prices, food prices, other commodity prices) then we are currently seeing a solid uptrend in underlying inflation in the economy, see the second chart. This suggests that the economy is not only close to full employment but it is also close to full capacity. For more discussion, see also this Fed paper “Are Some Prices in the CPI More Forward Looking than Others? We Think So”.
Source: Torsten Sløk, Ph.D., Deutsche Bank Securities
Super cool! Go to iTunes, select Category Business, than Popular Podcasts, and voilà! There we are at #33:
Our two-fer-Tuesday morning train reads: • Diverging Markets (Gadfly) • What Does History Say About The First Rate Hike And Stocks? (Ciovacco Capital) • The U.K. Is Quitting Coal. That’s Because Rich Countries Don’t Want It—and Poor Ones Do. (Slate) see also New York is transforming its energy systems. Meet the “czar” in charge. (Vox) • Hedge funds poach computer scientists from…Read More
Category: Financial Press
When four outsiders saw what the big banks, media and government refused to, the global collapse of the economy, they had an idea: The Big Short. Their bold investment leads them into the dark underbelly of modern banking where they must question everyone and everything. Based on the true story and best-selling book by Michael…Read More
A few weeks ago, I described why this economic recovery remainsdoubted and unloved. The improvements have been very unevenly distributed, with wide disparities based on education level, geographic location and industry. Some peoples’ recoveries are far worse than others. However, sometimes we lose sight of the basic facts. The data show the economy is…Read More
Short but action packed work week. Kick it off right with our artisanal morning train reads: • Three Lessons From Yale’s Endowment Fund (Morningstar) • Can You Pick the Guys Who Pick the Guys Who Pick the Best Stocks? (MoneyBeat) see also Faulty Assumptions (A Wealth of Common Sense) • Anatomy of a NIMBY: Grief over growth is perennial, but…Read More
Category: Fixed Income/Interest Rates