Tea in the Sahara

JACKSON HOLE, Wyo. -- Follow along closely. I promise (a) that this information will prove very useful and (b) that you won't see this explained anywhere else.

Recall this

Greenspan

nugget from his

Humphrey-Hawkins

testimony.

The number of people willing to work can be usefully defined as the unemployed component of the labor force plus those not actively seeking work, and thus not counted in the labor force, but who nonetheless say they would like a job if they could get one. This pool of potential workers aged 16 to 64 currently numbers about 10 million, or just 5 3/4% of that group's population -- the lowest such percentage on record, which begins in 1970, and 2 1/2 percentage points below its average over that period. The rapid increase in aggregate demand has generated growth of employment in excess of growth in population, causing the number of potential workers to fall since the mid-1990s at a rate of a bit under 1 million annually. We cannot judge with precision how much further this level can decline without sparking ever greater upward pressures on wages and prices. But, should labor market conditions continue to tighten, there has to be some point at which the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will begin to accelerate.

To calculate this pool of potential workers yourself, first head to the

employment

site. Then simply add the "persons who currently want a job" number in Table

A-10 (it's the second series presented in the table) and the "unemployed" number in Table

A-1 (it's the eighth series; and use the not seasonally adjusted number so that we're adding apples and apples). As a check on your math, the February 1999 number equals 11.266 million -- 4.703 million plus 6.563 million.

Histories of these numbers are available at a download

site (choose option 10 for the "persons" series and option 1 for the "unemployed" series). To save you some work, note that the sum being discussed stood at 11.404 million in January and that it stood at 11.716 million in February 1998.

So the pool of potential workers Greenspan is talking about (the one that numbers roughly 10 million, exactly as he noted) has dropped 3.8% over the last year, and it kept intact its downward trend between January and February.

Note that the U-5 rate in Table

A-8, which stood at 6.0% a year ago and fell to 5.6% last month from 5.7% in January, also captures this trend. This is (roughly) the "5 3/4%" rate to which Greenspan referred -- the one that currently sits 2.5 percentage points lower than its long-term average.

Now.

An extremely tight labor market is far and away the single biggest upside threat about which the

Fed

frets -- and rightly so. Absent that, the risk of runaway consumption (and hence economic overheating) plunges; so, too, does the potential for wage growth to accelerate smartly.

Now look back at the last sentence in the nugget above. Greenspan has told us, in terms clearer than an azure sky of deepest summer, exactly how he feels.

If

the labor market continues to tighten,

then

wage gains will increasingly outpace productivity gains,

then

prices inevitably will begin to accelerate.

Notes.

It matters not one whit that lots and lots of very smart people out there disagree -- some very violently so -- with the chain of events G. Love has laid out here. There is one man, and one man only, who's allowed to tug on the arm of the slot machine that is monetary policy. That man is Alan. And his are the only opinions that count. Not mine, not yours, not those of your favorite trader, and certainly not those of two of the most moronic, dimwitted and imbecilic blockheads ever to appear on a morning business television program. Alan's. Just Alan's.

The labor market did indeed continue to tighten last month. The numbers above show it (and you should check them every month). So does the fact that overall job growth accelerated to a 2.2% year-on-year pace in February from a 2.1% pace in January. So does the fact that service-sector job growth accelerated to a 2.8% year-on-year pace in February from a 2.7% pace in January. So does the fact that the trend (12-month moving average) in overall monthly job growth rose to 232K in February from 225K in January. So does the fact that the trend in monthly service-sector job growth rose to 235K in February from 228K in January. So does the fact that the number of discouraged workers just dropped to one of its lowest levels ever.

Nominal wage gains are already outpacing productivity gains. The most generous productivity estimate puts its pace of year-on-year acceleration at 2.8%. Meanwhile, the employment-report measure of wages is growing at a 3.4% rate, the employment cost index measure of wages is growing at a 3.7% rate, and Greenspan's favorite measure of nominal compensation is growing at a 4.3% rate.

These productivity-wage gaps will suffer one of two fates. Either labor-market conditions will continue to tighten and, as Greenspan says, nominal wages will start

increasingly

outpacing the gains in labor productivity -- meaning the gaps will get bigger -- or labor-market conditions will soften, and the gaps will get smaller.

The latter gives rise to a kind-rate (in terms of market rates and/or the

fed funds

rate) environment; the former gives rise to the opposite.

Figure labor markets are pretty unlikely to get tighter than they are right now? Fair enough. There are probably some good arguments lying around to support such a forecast. And if your belief in them is super-strong, you're right to dive into bonds.

But do keep in mind that over the past few years, an awful lot of very smart people have missed out on a whole lot of money by betting on all kinds of slowdown scenarios that never came to pass.

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