When the Jobs Number Comes Out, Look at Wages and Prices

Mmm. Sandy.

Know how to keep from confusing the spelling of desert and dessert?

Just remember that the tastier of the two has more S's. We'd all rather fill our holes with more pie than sand, right?

Always loved stupid little helpers like that. Here's another one: When markets reckon they've got something like an employment report figured out?

They usually don't.

A Market News survey of 16 economists and analysts predicts that the increase in July payrolls will come in at 275K, excluding the impact of Census-worker dismissals; that the unemployment rate will hold steady at 4%; and that average hourly earnings will show a littler increase for July (three-tenths) than they did for June (four).

Yet two sets of forecasters that your correspondent finds to be better (on average) than others at gaming these things -- the Goldman group and the Salomon Smith Barney squad -- see the numbers printing meaner than that.

Solly puts the ex-Census payroll print at 325K; Goldman pegs it at 350K. The thinking here is that the weak ex-Census job creation we saw during May and June -- a combined increase of just 16K -- represented payback for weather-induced strength during the first quarter. To the extent that that's run its course, we're in store for payroll prints that look more normal.

Also: Goldman draws attention to a technical adjustment problem whereby screwy seasonal factors served to suppress actual job growth in late spring. July marked the end of the freaky factors, and that, too, looks to boost the payroll print.

Elsewhere? The Solly economists look for the jobless rate to drop back to its April level (as well as its cyclical low) of 3.9%. Support here comes in the form of new claims for unemployment insurance (which dropped during the employment survey week) and the growing gap between the percentage of respondents to the Conference Board's confidence survey reporting jobs "plentiful" and jobs "hard to get" (which hit a record last month).

Finally, both groups figure average hourly earnings rose by 0.4% again in July on thinking that (a) underlying demand for workers remains solid at the same time we're dipping further into the pool of available workers and (b) this measure of wages is lagging behind its Employment Cost Index counterpart. (On that last score, Goldman notes that it wouldn't be surprising to see an increase bigger than 0.4%.)

Anecdotes (which are useless only when they don't support your point of view) also favor a strong report. One CFO reported on a news wire that job orders at his staffing firm grew 10% in July following a flat May-June. A Manpower executive vice president reports that "billings are about as strong as they've ever been" and sees "no evidence of a loosening labor market."

A spokesman for another staffing company says that the management-professionals portion of his business is "on fire" and that "demand is as high as it's ever been -- growth is expanding 20% year over year." Yet another reports that "we're seeing no slowdown. Orders remain very strong. There's an emphasis on office services and the professional arena."

For what it's worth.

Pie Tastes Good

Whatever the employment numbers print tomorrow? Keep this in mind: It's wages and prices that matter most right now. Not growth.

A huge July payroll print itself is nothing to fear -- as long as it comes with the news that wage growth didn't accelerate. Or that the unemployment rate didn't fall, or that the pool of available workers didn't shrink further (because policymakers think those things will accelerate wage growth for sure; not whether, but when).

If we do get an all-around big report, the balance between the favors-hike and favors-no-hike piles we've been collecting will tip dangerously toward the former.

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