Tags: Jeff Snider | economy | payrolls | Alhambra

Stagnant Wage Growth Belies Optimistic Jobs Data

By    |   Monday, 08 June 2015 11:20 AM

Economic data were routinely awful earlier last week, but by Friday, the jobs figures had washed away all sins.

For the most part, financial markets are moved more by how that might make Federal Reserve Chair Janet Yellen feel than anything of a fundamental basis for all those prices.

Typically, the surveys by the Institute for Supply Management are given serious consideration, so when their economists sound alarming it is widely noted:

“Slowing service sector growth adds to signs that the US economy has lost some momentum after an initial bounce-back from weather-related weakness at the start of the year. May’s PMI data showed service sector activity rising to a slightly smaller degree than signaled by the flash reading. Alongside the slowdown in manufacturing, the services PMI points to the weakest pace of U.S. economic growth since January.”

That view has been echoed throughout numerous other data points, in particular retail sales and the personal consumption expenditure (PCE) price index. There was the sharp slowdown that started not in the first quarter, but back in November, then a small bounce in March as expected (in terms of timing not degree) and then nothing. If the ISM and other sentiment surveys are picking up that second derivative a second time, that would seem to be rather widespread unification.

None of that matters anymore, apparently, because of the focus on jobs. The payroll report for May, as in January, was just about perfect: high headline number, a jump in full-time employees and the labor force, and at least a close read on the household.

All of that adds up to very little outside of what seems to pass for conventional “wisdom” about the economy. I’m not sure when it happened, but the payroll figures seem to have surpassed everything else in terms of the economy’s weight in at least setting mainstream media perceptions, likely because bubble rationalizations do not like to be disturbed – and the payroll report is about the only account that obliges.

Splitting Hairs

Despite a jump in full-time payrolls, the overall recovery trend remains as it has for years now. The run of below-peak employment now stretches an unbelievable 90 months (longer than even most car payment terms now) meaning that month-to-month variation is like splitting hairs. The labor force improvement in context is a drop in the bucket, as there still is little incentive for those not in the labor force to change their status (in official counting).

The numbers just don’t much change overall. Where last month there were 14.1 million “missing” people in the official stats, this month there are “only” 13.9 million. What is most curious and important for my analysis is the fact that no matter the job count actual spending is contracting.

The retail sales figures only tally through April, which means given the nearly 300,000 addition in the establishment survey in May that retail sales will have to surge by an enormous amount just to get back to something positive. No matter your view on the BLS’ work overall, that is the true problem and the source of all statistical discontent (tracing back to wages).

The spending figures alone cast serious doubt on the payroll reports, a case that I have made repeatedly. From my view, the only factor that matters to the BLS is not actual economic growth but instead jobless claims. That is the only durable correlation that survives especially in 2014 and now 2015, and may even be redundant.

The average gain in the establishment survey is about where it was in 1999, as is the reduced count in jobless claims. Clearly, however, the economy at the moment is nothing like 1999, even when considering the “progress” of serial asset bubbles.

No Wage Gains

There are no wage gains to accompany these “perfect” payroll numbers, just chained monthly variations set considerably upward. In fact, for the increase in supposed payrolls in May, average weekly pay of production and nonsupervisory employees grew less than 2 percent for the third consecutive month. The six-month average is now down under 2 percent for the first time since 2013.

In other words, wages do not confirm the robust headlines — and are heading in the wrong direction, like spending.

This has perplexed economists, especially those at The Wall Street Journal yet again (at least they acknowledge that “Americans aren’t getting a raise”), simply because payroll expansion does not conform to anything else.

Real experience is highly different than what the BLS says it is, meaning that “slack” as an economic concept is misaligned to the pitiful nature of this economic expansion. Secular stagnation blames the economy for this situation, so various orthodox economic outlets and models can mark down “potential” in a manner that is meaningful only to those same models and economists.

No Recovery

In short, the amount of “slack” is enormous still because there has been no recovery, a fact made plain even setting aside all the very reasonable and compelling reservations about these perfect payroll reports.

The only way to view quantitative easing as having been successful is to so degrade economic potential that it now amounts only to whatever gross domestic product is today. In the real economy, that reduction doesn’t stand; the real economy suffers from the opportunity cost of not attaining meaningful progress no matter how much economists (and statisticians) convince themselves that monetary policy could not possibly fail so spectacularly.

Americans aren’t getting a raise because the economy is gone not because economists can’t find the “right” calculation for slack. The payroll reports cloud that issue immensely, when they should be providing clarity.

The point of monetary policy these past almost-eight years now has been to stimulate “aggregate demand” rather than the count of the establishment survey alone. It was simply assumed that one would follow the other.

In terms of peak-to-peak, it has failed on both accounts. It is pretty well established (pardon the pun) now that the payroll report is going to be good no matter what, meaning that this analysis is, as it has been for quite some time, redundant month after month.
The true economic insight is to figure out why the divergence; economists blame you and me, I blame the Bureau of Labor Statistics for at least allowing them some cover in doing so.

Put the payroll reports on something less of a trend-cycle basis and the entire monetary/QE narrative falls apart, with nothing left.

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Economic data were routinely awful earlier last week, but by Friday, the jobs figures had washed away all sins. For the most part, financial markets are moved more by how that might make Federal Reserve Chair Janet Yellen feel than anything of a fundamental basis.
Jeff Snider, economy, payrolls, Alhambra
Monday, 08 June 2015 11:20 AM
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