The Street Gets Inflation Threat Backwards
There has never been an expansion cycle in the past 45 years in which the participation rate (those actually in the labor force as a percent of those that could be in the labor force) trended lower save for the current one. Had the labor participation rate risen in a normal cyclical fashion, today's unemployment rate would be considerably higher
Further, benchmark revisions to the population controls to the household survey by the Census Bureau may have also had an inadvertent impact of lowering the unemployment rate. Note that this is not an actual measure but an accounting adjustment. (See
The weak labor participation rate should put the Fed's mind at ease as to the slack in the labor market reason: There's plenty of it.
Non-farm payrolls (NFP) gave the Street yet another way to misread inflation.While January's NFP number was far below consensus, it was misunderstood in several ways:
|All Employees Total Nonfarm|
Wage InflationWe know that wage inflation is Public Enemy No. 1 for the Fed. Do the most recent data give it cause to act pre-emptively? Hardly. January hourly wages rose 7 cents per hour -- that's a 3.3% increase. As you can see from the constant-dollar CES chart below, wages dove in late 2005 after the hurricanes hit. They have since snapped back to pre-hurricane levels. But they are hardly trending upwards.
|CES Average Hourly Earnings|
Reap What You SowThe Fed's reflation has succeeded all too well. The prices of homes, food, energy and all manner of commodities have been moving higher for several years now. Wall Street has mostly ignored this kind of inflation. Income, on the other hand, has been fairly stagnant. I'm hard pressed to recall any union negotiating victory in recent years. Globalization and outsourcing have kept wage pressures extremely low. I expect the economy to slow in 2006, and to possibly enter a recession in 2007. If the Fed erroneously misreads the most recent data as proof of a too-strong economy and a tight labor market, it risks turning a bad, but manageable, situation into a disaster.
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