This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Street Gets Inflation Threat Backwards

Kasriel notes:
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 this for more details.)

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

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:

  • The three-month average of 229,000 is misleading. Why? Recall that the hurricanes altered NFP data in September and October. The BLS repeatedly noted that reporting the data of displaced/relocated personnel was going to be problematic. To the bureau's credit, it eventually managed to track down most of the relocated workers; hence the upwards revisions. Hence, the revised three-month average is revealing of little, other than that many displaced Gulf/New Orleans employees have settled into new jobs.
  • With NFP a negative 8,000 in September and a plus 56,000 in October, that makes the five-month average 147,000. When job creation barely keeps up with population growth, it's hardly inflationary.

  • January is one of those months when the seasonal adjustments have an enormous impact. This happens every year, as the temporary holiday workers finish their stints. But it points out that the 193,000 payroll figure, which some are fearing as a sign of inflation, needs to be taken with a grain of salt.
  • Measured in actual job gains (i.e., not seasonally adjusted), the economy lost 2.625 million jobs from December to January.

  • Year-over-year payroll growth appears to be peaking, as this chart shows. Kasriel notes that "year-over-year nonfarm payroll growth appears to be peaking out around 1.6% -- lower than any other cyclical peak in the past 45 years."
  • All Employees Total Nonfarm

    Wage Inflation

    We 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.

    Source: CES

    The most recent wage increase is very likely the result of the mix of new construction jobs -- especially in the Gulf region. That's hardly emblematic of surging wage pressure.

    Looking at wage improvements since 1965, we are coming off the lowest annual improvement levels in half a century. In fact, the recent wage gains are weaker than even the lows in 1986-87 period.

    CES Average Hourly Earnings

    In the 1970s, wages rose at a 6% to 8% annual level. Coming from below 2% annual gains, and still far below 4%, is hardly cause for concern.

    Reap What You Sow

    The 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.
    Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.

    3 of 3

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Options Profits

    Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • Actionable options commentary and news
    • Real-time trading community
    SYM TRADE IT LAST %CHG
    TLT $121.02 -0.83%
    AAPL $111.12 3.20%
    FB $89.28 2.40%
    GOOG $609.24 1.90%
    TSLA $245.85 3.00%

    Markets

    Chart of I:DJI
    DOW 16,265.33 +206.98 1.29%
    S&P 500 1,934.01 +20.16 1.05%
    NASDAQ 4,707.7010 +71.5960 1.54%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs