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Watching Jobs: Friday's Numbers Expected to Help Write the Fed's Tale

David Gaffen

Filled with phrases like "wage pressures intensified," "worker shortages" and "some retail chains had given store managers the leeway to set local wages competitively," the anecdotal survey is yet more evidence of what's recently begun to show up in official data. Specifically, the demand for labor is having an effect on wage costs, which are rising steadily.

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The consensus estimate for tomorrow's report is a 358,000 increase in new nonfarm payrolls, a 4.0% unemployment rate, and a 0.4% increase in average hourly earnings.

For months, the markets were able to operate on cruise control, as economists' and Alan Greenspan's concerns that tight job markets would ultimately produce wage inflation seemed like whistling in the wind. While wage costs have been ticking up modestly during the early part of this year, it took last week's release of the Employment Cost Index to affirm that, yep, wage costs are indeed hitting company costs.

Many believe a larger-than-expected increase in the average hourly earnings component could well provide enough evidence to send the Fed off to a 50-basis-point rate hike at its upcoming May 16 meeting. Several economists believe it won't happen, thinking the Fed will stick to a gradualist policy, continuing the pattern established by five earlier rate hikes. The 0.4% consensus estimate for average hourly earnings growth would bring the year-over-year rate of increase to 3.9%, the highest since January 1999, when it briefly touched 4%.

Productivity figures are causing some doubt whether wage increases will directly result in a more aggressive Fed policy. With productivity accelerating, companies are able to produce more goods, and sell more products, thereby offsetting the wage increases -- which, in and of themselves, are not necessarily inflationary.

Productivity increased at a less-than-expected 2.4% rate in the first quarter, the Labor Department said. However, the year-over-year trend remains positive, as productivity is up 3.7% from a year ago (the highest since 1992), and that supports a continued gradualist Fed policy. So, while labor costs are rising, high productivity continues to offset those increases.

"As long as productivity is strong, a little more earnings growth is OK," said Carol Stone, deputy chief economist at Nomura Securities, looking for 380,000 in new nonfarm payrolls. "People are working harder and producing more; they deserve to get paid more."

Some believe the Fed could react with a bit of "sticker shock" if the unemployment rate drops below 4%. Depending on the growth of the labor force in April, that 4% bellwether could well be breached for the first time in more than 30 years.

The unemployment rate is expected to tick down to 4% from March's 4.1% rate. But Brian Jones, economist at Salomon Smith Barney, has been forecasting a 3.9% rate for a few months running, "because that's where we're headed." The hiring of temporary census workers could push down the rate. Although temporary, a surprisingly low figure could spur more calls for aggressive action -- probably by some of the Fed's more hawkish members themselves.

However, some economists, including Stone and Jones, don't buy the theory that the economy is running out of people. While it's true that the labor force continues to shrink, Stone says there's still room for people to find jobs, citing evidence that people who retired early a decade ago have been returning to the workforce and the lower-than-historical participation among students.

All that said, the nonfarm payroll figure is actually the lesser of the components this month. Job creation has been strong for years -- and this figure isn't going to disprove that this month.

Economists' 358,000 estimate includes anywhere from 150,000 to 200,000 temporary workers hired by the Census Bureau. Excluding those workers (and that's hard to do, because it assumes none of them would have gotten jobs were it not for the Census), that represents a slight moderation from peak job-creation in late 1998 and early 1999. But, it's still very strong.

"Construction is probably going to be negative (due to seasonal adjustments)," said Jones, who is forecasting a 475,000 increase. "But the manufacturing sector is looking better anytime we get a new piece of data."

The expectation for the average workweek is to remain unchanged at 34.5 hours per week.