Tags: economy | markets | jobs | fed

Rising Labor Costs Will Hurt Earnings If Not Passed On to Consumers

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Friday, 04 January 2019 03:31 PM Current | Bio | Archive

INDICATOR: December Employment Report

KEY DATA: Payrolls: +312,000; Revisions: +58,000; Private: 301,000; Unemployment Rate: 3.9% (up 0.2 percentage point); Wages: +0.4%; Over Year: 3.2%

IN A NUTSHELL: “Economy to Markets: The reports of my death have been greatly exaggerated. Sincerely, the Economy.”

WHAT IT MEANS: Every once in a while you get a number that is way out of line, either on the upside or downside, and that was the case with the December jobs growth. The employment gain was breathtaking, especially given all the complaints about not be able to find qualified labor. I dust believe the businessperson protest too much. Job growth was strong across the entire economy with seventy percent of the private sector industries posting gains. That is huge. Outsized increases were seen in health care, restaurants and construction. Manufacturers added lots of workers and state governments padded their payrolls, and it wasn’t in education. Even department stores, which are supposedly disappearing, hired lots of people.

With hiring so strong, people who had been sitting on the sideline came back into the labor market. The labor force surged and given that it takes time to find a job, the unemployment rate rose. That was likely a temporary, but not unusual, phenomenon which should reverse in the months to come.

Strong demand for workers and a low unemployment rate caused hourly wages to pop. While this number is largely useless because it depends upon the distribution of workers, not what happens in individual industries, it is followed, unfortunately, very closely. The increase over the year is accelerating, which at least on the surface, points to rising pressures on business costs.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday, I noted that the economy was decelerating not declining. Words matter and the reality is that the economy is the same today, after a huge jobs report, as it was after we got less than stellar reports yesterday: It is moving ahead decently if not solidly. Indeed, there are likely to be some at the Fed who think that the decision to scale back the number of potential rate hikes was premature. The problem is that too many commentators, politicians, businesspeople and investors continue to confuse slowing with falling. They both end in ‘ing’, but are far from the same thing. There is also continued confusion about why the Fed is raising rates. I keep hearing that with inflation low, there is no reason to raise rates. Duh, the Fed is not raising rates to control inflation or slow growth. Even the members can read the data. They are raising rates to get back to normal because the economy no longer needs the stimulus but the Fed needs to be prepared for a future recession. If you understand that, as well as the difference between slowing and declining, the additional rate hikes make sense. Maybe more importantly, wage gains are accelerating and better than expected job growth is likely to cause labor costs to rise faster. Whether that would lead to accelerating inflation is to be seen, but if the rising labor expenses are not passed on to consumers, earnings might have to take a hit. That is what the markets should be most concerned about.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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Wage gains are accelerating and better than expected job growth is likely to cause labor costs to rise faster.
economy, markets, jobs, fed
Friday, 04 January 2019 03:31 PM
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