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Misery Index Falling Along With Jobless Rate

Misery Index Falling Along With Jobless Rate
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Wednesday, 09 August 2017 12:31 PM Current | Bio | Archive

While real GDP growth continues to amble along at a leisurely pace of 2.0% y/y, the labor market is sprinting at a fast pace. In the 7/31 Morning Briefing, Debbie and I described our 2-2-2 economic scenario, with real GDP continuing to grow around 2.0% y/y, inflation remaining at or slightly below 2.0%, and the federal funds rate peaking late next year at 2.00%.

One of our accounts suggested expanding our Three Deuces scenario to Four Deuces (2-2-2-2) by adding the unemployment rate. The jobless rate was 4.3% during July and could fall to 2.0%, which would be the lowest on record starting in January 1948 (Fig. 1). The low for this series was 2.5% during May and June 1953. A new record low, even at 2.0%, is conceivable if the Three Deuces scenario continues to play out. That’s because having slow economic growth with subdued inflation and low interest rates increases the odds of a very long economic expansion, with the labor market continuing to tighten.

That would be ideal for our “long good buy” scenario for the stock market, since bull markets usually don’t end until the unemployment rate falls to its cyclical trough and starts moving higher (Fig. 2).

The stock market also does well when the Misery Index, which is the sum of the unemployment rate and the inflation rate, is falling (Fig. 3 and Fig. 4). Indeed, there is an inverse correlation between the Misery Index and the S&P 500 P/E since 1979 (Fig. 5).

Consider the following:

(1) The sum of the forward P/E and the Misery Index has averaged 23.9 since 1979 (Fig. 6). It was 23.6 during June, suggesting that the stock market is fairly valued.

(2) A lower Misery Index, as a result of a further decline in the unemployment rate, would leave more room for P/E expansion without irrational exuberance. If the unemployment rate drops from 4.3% to 2.0% and the inflation rate remains at 2.0%, that would lower the Misery Index, leaving room for a reasonable increase in the forward P/E from 17.8 currently to 19.9 (since 19.9 + 4.0 = 23.9, which is the average of the Misery Index since 1979).

So, hold ’em, don’t fold ’em because there is no reason to be miserable. As the song goes: Don’t worry, be happy!

Help Wanted! Yesterday’s releases of June’s JOLTS report and July’s NFIB survey of small business owners both confirm that the labor market is getting tighter and tighter, which means that the unemployment rate could continue to fall, which means less misery and higher stock prices, as we just explained above. Debbie reviews both releases in detail below. For now, let’s consider a few of the reasons to be happy if you are looking for a job, but not so happy if you are looking for help:

(1) JOLTS. At the end of June, there were a record 6.2 job openings (Fig. 7). That month, there were 7.0 million unemployed. So the ratio of unemployed workers to job openings was 1.1, matching the low for this series in January 2001, which is one month after the start of this data. As we’ve noted before, this suggests that the economy is at full employment with only “frictional” unemployment resulting from geographic and skills mismatches.

Labor market activity remained brisk in June, with near recent cyclical highs in hires (5.4 million) and separations (5.2 million). Over the past 12 months through June, hires totaled 63.4 million, while separations totaled 61.1 million (including 3.1 million quits and 1.7 million layoffs) (Fig. 8). Given that payroll employment totals 146.6 million, that’s an amazing amount of turnover in the labor force. (By the way, could it be that productivity suffers when there is too much turnover of workers?)

(2) NFIB. During July, 35.0% of small business owners reported that they had job openings (Fig. 9). That’s the highest reading since November 2000. Most disturbing is that 52.0% reported that there are few or no qualified applicants for job openings.

There is a strong inverse correlation between the unemployment rate and the percentage of small business owners with job openings (on a three-month average basis) (Fig. 10). The latter suggests that the unemployment rate could easily fall to the 2000 low of 3.8%.

(3) Wages. Meanwhile, despite the tightness of the labor market, wage inflation remains subdued. While lots of small business owners report that they could use some help, average hourly earnings inflation remains around 2.5% y/y (Fig. 11). On the other hand, median wage inflation was 3.2% during June, suggesting that the Phillips Curve isn’t completely flat (Fig. 12). I asked Melissa to look into why median wages are rising faster than average ones. Stay tuned.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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The stock market also does well when the Misery Index, which is the sum of the unemployment rate and the inflation rate, is falling.
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2017-31-09
Wednesday, 09 August 2017 12:31 PM
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