Wages and the Fed.
Both bulls and bears are examining wage growth for signs of incipient inflationary pressures. The current debate seems to assume that wages are completely determined by how much slack there is in the labor market and overall economy. Both conservatives and liberals seem to believe that if employment fall below current levels that wage growth must accelerate. Standard analysis seems to completely ignore the point that inflation expectations plays a significant role in the wage setting mechanisms.
I have been using a wage equation that I first developed some 20 years ago and it has worked extremely well to explain average hourly earnings growth as far back as the wage data goes, 1964. The equation has three variables, unemployment, manufacturing capacity utilization and the trailing three year change in the CPI. This is used as a proxy for inflation expectations because other measures of inflation expectations do not have a long enough consistent history. For those of you that like to duplicate work they see online, the equation does have a fourth variable that I call Nixon. It is a dummy variable for wage price controls in the early 1970s.
As you can see the equation explains wages very well through the acceleration of wage growth in the 1960s and 1970 and wage moderation in the 1980s and 1990s. The only time it fails is when it called for wages to fall after the great recession. I believe this is just another example of how wages are sticky and that business had good reasons to not implement widespread wage cuts after the Great Recession.
The second chart shows the three year trailing CPI. At 1.3% is at the lowest level experienced since the 1950s. Moreover, it is in line with other widely quoted measures of inflation expectations. This means that low inflation expectations are offsetting some of the upward pressure on wages from the low unemployment rate and high capacity utilization. Consequently, I believe that the Fed – as well as those who have been warnings that runaway inflation is just around the corner — are overly concerned with the risk of employment gains leading to higher wages and inflation. This fed can easily leave rates at low levels with little fear that wages growth and inflation will accelerate.
I don’t see how we get runaway inflation in this low wage and high total household debt environment.
First, I don’t see a low unemployment rate, the low U3 is a fiction created as more and more unemployed fail to be counted as unemployed. If you get unemployment benefits then every 2 weeks you are signing a form that states you have been looking for work and where you have applied. Once you are no longer eligible for unemployment benefits, no one asks if you are still looking for a job on a regular basis.
Second, the ‘Persons not in the labor force’ is still growing. It was 91,794,000 in August 2014 and 93,706,000 in August 2015.
See: http://www.bls.gov/news.release/empsit.t16.htm
Third, U6 is still high. We have a large pool of workers working part time but who need a full time job. In August 2015 there were 6,361,000 with part time jobs for economic reasons. That is lower than the 7,083,000 in August 2014 but it is still a very large number.
See: http://www.bls.gov/news.release/empsit.t08.htm
Those three things mean that we have a lot of competition for a higher paying job. But higher paying is not what it used to be.
Wages paid to labor are subject to supply and demand. Why would any employer pay more than he has to? In the 1960s, 1970s and 1980s, most of us got a raise because we could quit and go to another job with better pay. Does anyone believe that is still possible on anything like the scale before 1990? Currently, if you have a decent non temporary job, you would be crazy to quit.
There is plenty of downward pressure on wages.
I don’t know how you would put all of that on a graph, but that is our problem. These are not anything like normal times.
Donald Trump is tapping into the frustration caused by this. He blames illegal immigration and free trade. (China) It makes no difference whether he is right, or wrong, his claims address job and wage issues. And his polling numbers continue to rise.
Consumers can not spend what they do not have. Producers will not produce what they can not sell. This economy needs increased demand. Increasing total household debt was always leading to a dead end and we are now at that dead end. Americans have maxed out their credit, but their increasing debt kept the economy alive for the extra 5 years from 2003 to 2007 inclusive. Now the only way to increase demand is to raise wages. The current competition for jobs will not allow that. That job competition need to be reduced. One way would be to force production back into this county with higher tariffs on imports. (As high as needed.) Got a better idea?
Except consumers are spending money they have and they have more than you think.
The trouble with government statistics on inflation and wages are hedonic adjustment. Major major problems.
JohnH, production can’t be forced in by higher tariffs. Because that production can’t make it with the high living standards. Production has been leaving the US since the 1950’s due to rising living standards. Much like it did in Europe in the 19th century. Your in denial about capitalism.
Saying the U-6 is still high is mumbling. Nope, it isn’t that high anymore and it will be below 10% soon enough. The speed of adjustment to full time employees trucks on.
The truth is, the economy in a capitally driven system is what it is.
JohnH?
Rising living Standards?
Companies move production to avoid Overhead, not Direct Labor cost.
Another wrong point John, is about Trump. He isn’t tapping into anything. His immigration takes are dialectical. Most of the people that like his immigration takes are uneffected by illegal immigrants and only care for a sense of tribalism. That makes it dialectical. The fact Trump focuses so much on Mexico exposes how toothless and noncaring people are about it(and Jeb pointed that out recently) considering the biggest wave is coming from Asia amid a major reduction from Latin America.
White people barely have any relation to illegal immigration. Blacks have a modest relation. Legal immigration is where the real fight is at.
We live in a global village. Wages for global workers have been rising at high rates – just not in the US. Tariffs are not a good fix for this problem, but they are a tempting option.
An alternative? Blow up the tax code. Incomes of up to (approximately) $50,000 are free of all taxes including payroll taxes. Offset the tax loss with a national sales tax that is skewed to tax consumers of big ticket items.
This would be revenue neutral. Workers who earn less than the threshold (and therefore do not pay SS taxes) would continue to earn SS credits at the rate of their income, not their contributions. (Revenue neutral to SS)
This would benefit about 70% of all workers, it would add $340b back to those 110m workers.
Reader question; What G-7 country (other than the USA) does not have have a VAT tax?
Every time I hear about this “high debt” thing, I shudder.
Couple of weeks ago I had a discussion on the subject with someone on EV.
He quoted the consumer debt totals in 1980, put in inflation and population growth and came to a conclusion that we are 4 times as indebted as the people in 1980.
I added interest rates, and the numbers totally matched.
Meanwhile,
This country cannot continue if we do not protect our workers. Not just talking about minimum wage or living wage workers. We cannot exist as we are, let alone were, without protecting ourselves from competition from people that live outside the country.
Wow that’s a very impressive fit. Your equation is an old Keynesian equation (because you regress on trailing inflation rather than assuming rational expectations). Note it was abandoned about halfway through it’s 40 years of totally triumphant success (after around 1980 similar equations appeared in undergraduate textbooks but never in the peer reviewed literature).
I think the reason that inflation expectations are not discussed is that people are thinking of changes in inflation. The assumption that expected inflation is roughly the same as lagged inflation is implicit. So people think a tight labour market will cause increasing inflation (not high inflation).
Of course this makes it mysterious why people are talking about raising interest rates, since inflation is currently below target.
All the talk about raising interest rates is coming from the elite-nobility Wall St. bankers who control Washington’s printing machine. That said, the larger and growing pool of workers who own and make little have no real savings or spending power to drive the economy. This is the result of the past 20-30 years of having no real border policy enforcement. Along with unchecked “free trade “open door one way trade policies… Do not reduce competition for jobs or have less house hold incomes but rather increase domestic demand for everything by way of the “Balanced Trade Agenda” with China or any other predatory country imbalanced with the tariff until reasonable-fair balances are reached…Advanced mfg. can compete through lower over head and operating cost along with a tax credit for R + D. and innovation… The real truth is that “free markets” are not free neither is krony kapitalism. All people a relation to the open border and unfair trade policies that have undermined the American middle class standard of living-savings and investment for many years now. Its time to get out of your box on political and economic thinking.
Robert, I use a lagged equation because in my consulting work I only use reported data on the basis that no one can forecast. It is part of my marketing material.
Spencer:
That is pretty slick! Thanks for showing it.
Stanley Fischer left us some interesting questions in his recent speech. He stated that he “has reasons” to be confident that inflation will soon pick up to the “near to but under 2%” that seems to be the Fed’s actual goal. He did not feel impelled to share with us what those reasons are. He also mentioned in passing that “we are getting close to our maximum employment goal.” That’s not a term I’ve heard bandied about before, and may have been a slip of the tongue, giving away his real reasoning by accident. I wonder what his reasoning is for that. Evidently all the consultants that the Fed chooses to predict NAIRU are chosen from banks and hedge funds.
The move to higher interest rates is not being pushed by Wall Street, Republicans or the ‘tight money’ crowd. It’s coming from Yellen. She is a Dove. So what is her motivation to move forward with a rate increase when inflation is a non issue?
I think she sees inflation around the corner. Her view of the economy is that the next 24 months will bring us higher growth and inflation. This economic outlook is supported by a report released today from CBO. This is what CBO had to say about the near future:
“Over the next few years, reduced slack in the
economy-as evidenced by the narrowing gap
between GDP and potential GDP-will put
upward pressure on inflation and interest rates.”
There are many interesting slides in the report. I hope that CBO has the correct view of the future, Happy Days are right around the corner! I don’t buy the enthusiasm…….
The report:
https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/presentation/50797-presentation.pdf
Certainly an inpressive fit. But also a remarkable deviation after 2008.
You state “inflation expectations plays a significant role in the wage setting mechanisms”. Based on which sources? I understood that actual inflation, and not inflation expectations, play a significant role.
But maybe the impact of both is almost identical in the long run.
Bkrasting the problem is the CBO and many others are looking at old school data or KPI’s where most of the graphs they are looking at are not so relevant to what is happening today. For example the GDP graph cannot show that almost 80% of the GDP is strapped with public debt…The inflation graph, interest rate graph, GDP growth graph, unemployment graph, labor participation rate graph all shows mostly flat line projections. So I think Yellen is only trying to assert her miniscule control over the plutocrats on Wall St.. There is no sound-sanitary economic sense to increase rates from these views…But we do need to look more at “other” data like the price of oil, the rise of China alliances, the collateral damage from the ISSL wars, and the excessive printing of money. Perhaps it’s the excessive printing of dollars has made the real value of a dollar now about 1 cent or 100 times less in value. Perhaps that is where the real inflation fears are coming?
William Ryan – You say the CBO outlook is “not so relevant to what is happening today”.
Ok, then look at what happened TODAY. The JOLTS report came out. It was much better than was anticipated. The slide on page 2 tells it all. The ratio of job openings to workers seeking jobs fell to 1.4. This a level not seen since 2006/2007 (before the SHTF).
Yellen is under pressure to not move. But this JOLTS report is going to push her to move in September.
IMHO Yellen is in a trap of her own making. She has been saying that rates will rise in the fall for a year now. She can’t back off now. It would hurt her (and the Fed’s) credibility.
I think we will get the 25BP in Sept. Yellen will say at the time, “We moved a very little bit, and now we will sit back and see what happens the next half-year”.
“25 and Done” would actually ease tensions in global markets. This is a negligible change that will be of no consequence to borrowers (CC or mortgage rates). A 25 bp change is already “priced in”.
The JOLTS report from BLS:
http://www.bls.gov/web/jolts/jlt_labstatgraphs.pdf
geez
If a 25 basis point raise would ease tensions in global markets, there is no tension in global markets.
BTW,
A labor market is not tight enough to cause inflation unless it is tight enough to raise wages.
That ain’t happening yet, just like it hasn’t happened much in a long, long time.
EM – No tensions you say?
Chinese stocks are down 30+% in two months. The government has committed $1T to a bailout. The Chinese sold $94B of treasury securities. The currency was devalued. No tension at all…
Brazil, the 7th largest economy has officially entered recession. The currency has devalue by 22% since June.
The EU and Japan are conducting massive amounts of QE in an effort to stop a slide into deflation. The C$ and A$ are pushing record lows.
Oil prices have collapsed (as have most other commodities) as the outlook for global growth has declined. This is a problem for the big ME producers. Saudi Arabia, Oman are dipping into their reserves to fund big deficits.
You measure “tension” in markets by price changes. The price of crude shot up 27% in just three days recently.
The Russian Ruble has lost 22% of its value since June. The economy is in the tank. The Turkish Lire has lost 13% since July 1. The S.African Rand is down 17% in two months.
I could go on for a bit, if you don’t see evidence of tension, then you’re not looking. Try googling “Global Market Tension” and search the last month of stories.
Um, Krasting?
I did not say there were no global tensions. I said if a 25 basis point increases would ease them, then there were no global tensions.
See the difference?
Not one of those things you mentioned would be affected at all by a Fed rate increase. Not even a little bit.
You are arguing like Stan Fisher.
EM – the markets are facing another “tantrum”. It’s the uncertainty of what the Fed will do, and how much they will do. If Yellen were to do my “25 and Done”, then the markets would no longer face uncertainty, and would likely settle down.
Does the uncertainty add to tensions? Look at my comment above re JOLTS and the consequences to Yellen’s choice. The Dow is down 350pts since the report came out:
http://www.zerohedge.com/news/2015-09-09/dow-jolted-200-points-highs-septermber-rate-hike-odds-rise
I assume you are likening me to Stan Fischer, not Fisher? If so, I thank you for the compliment. A Fed Governor with a distinguished academic career? I wish that I was as accomplished as he.
Stan’s bio:
http://www.federalreserve.gov/aboutthefed/bios/board/fischer.htm
Bkrasting you make very good points but much our market rise is from stock buy backs that artificially inflate stock prices.. One last point for the .25 and done crowd is seen at Reality Check.com where they show that the trade deficit for June ,July, August this year at $73B,$74B,$75B respectively and all new records. This works out to about $1T deficit for the year…Then look a bit closer to see their projections for inflation adjusted show for exports 2015 = 1.7%, 2016=4%, 2017=4%. Last are the numbers for imports show much higher inflation rate projections of 5%,6%,7% respectively. Perhaps this may be where some of the inflation fears are coming from?
Ah, the Confidence Fairy strikes again.
My apologies, I meant Rick Fisher, not Stan Fischer.
“I tried to argue against the points Richard Fisher is making in my column yesterday”.
http://economistsview.typepad.com/economistsview/2015/09/the-fed-must-act-soon-why.html
BTW,
Spare me the zero hedge crap.
BTW,
One of my favorite things comes from those that watch the market constantly, and especially the little news blips like:
The Dow fell due to this” or “the Dow rose due to this”.
Yeah, it is always that simple.
So we get the Krasting thing yesterday:
“Does the uncertainty add to tensions? Look at my comment above re JOLTS and the consequences to Yellen’s choice. The Dow is down 350pts since the report came out:”
or EVs resident Twitter news feed yesterday:
im1dc said…
Volatile Day
http://www.businessinsider.com/closing-bell-september-9-2015-9
“STOCKS GET SLAMMED INTO THE CLOSE: Here’s what you need to know”
by Akin Oyedele
“Stocks tumbled in the final hour of trading, wiping out an early morning rally that took the Dow up as much as 170 points.
A decline in Apple shares weighed down the blue-chip Dow after the company held an event to unveil new products. And, the energy sector had the biggest drop on the S&P 500 as crude oil prices fell.
First, the scoreboard:
Dow: 16,253.97, -238.71, (-1.45%)
S&P 500: 1,942.09, -27.32, (-1.39%)
Nasdaq: 4,756.53, -55.40, (-1.15%)”…
http://economistsview.typepad.com/economistsview/2015/09/links-for-09-09-15.html#comment-6a00d83451b33869e201b7c7cba4a5970b
Somehow I find these comments hilarious.
Ok – my market thoughts are not relevant at AB. Possibly consider a better source of info on markets – like the WSJ. The lead story today:
Global Stocks Mixed on U.S.
Interest Rate Uncertainty
Markets remain nervous about the
timing for the U.S.’s first rate increase
in almost a decade
http://www.wsj.com/articles/global-stocks-fall-on-u-s-interest-rate-uncertainty-1441872957
You guys want to remain in the dark on what makes markets tick, be my guest.
Yeah, the WSJ talks about interest rate uncertainty, and that means anything.
Look, above you talk about the 25 bps raise already being priced in(not sure that is in any way accurate), so why would anyone have any uncertainty?
It is just larry Kudlow kind of insanity. They have to say something, so they say “that”. Or “this”. Or “whatever”.
Here is what they should say:
” A Market Update for Real Investors
News for people with long attention spans.
NEW YORK — One hundred forty-eight million eight hundred thousand and five Americans woke up and went to work Monday in what economists called a “remarkable, collective effort of people trying to improve their lives and take care of their families.”
Analysts also confirmed that about 30 million U.S. companies were open for business, with widespread reports of an urge to innovate and keep up with competition.
“We tend to see this on Mondays,” said John Peterson, a Goldman Sachs analyst. “People wake up, go to work, make money, pay their bills, save the rest, and get on with life.”
American businesses earned $4.62 billion of net income Monday. Financial advisors, analysts, and brokers, collected $630 million in fees. The difference will accrue to investors’ net worths over time, analysts said.
“Our outlook calls for the same thing on Tuesday, continuing into Wednesday,” Peterson said. “People go to work. Businesses innovate and reinvest the profits, and it just cycles on from there.”
About five thousand workers were laid off on Monday, and more than 4,000 companies went out of business. But more than 13,000 workers were hired, and more than 5,000 new businesses were created. Technical analysts studying charts called it a “classic capitalism pattern” and expected it to continue.
Fifty-five million American kids went to school Monday, compounding the knowledge learned from all previous generations. Analysts confirmed that many of them will become doctors, engineers, and scientists.
In San Francisco, 30-year-old Megan Johnson said the line at her local Chipotle was out the door and wrapped around the building, in what she described as “a pretty clear example of what happens when a company takes a simple product like a burrito and puts a little more effort into making it better than the competition.”
By the end of the day, 1,604 patent applications had been filed with the U.S. Patent and Trademark Office. “Most of those ideas won’t go anywhere,” said PTO analyst Greg Jones. “But a few will be huge. Ten, 20 years from now, a handful of patents filed on Monday will change the world. That’s so cool to think about.”
In Palo Alto, Calif., there were widespread reports of 19-year-old Stanford students tinkering with gadgets in their parents’ basements. During a call with investors, Sean Rogan of Realistic Asset Management said he’s confident a few of them are working on something that will change the world in ways we can’t even fathom. “We see this with every generation, frankly,” he said. “Ten years from now, one of these kids is going to be the next Bill Gates. It makes me excited to be an investor.”
U.S. oil fields pumped more than 9 million barrels of crude Monday, near the highest level since Richard Nixon was president. Economists surveyed by Bloomberg unanimously agreed that this was “pretty awesome.”
The Dow Jones Industrial Average lost 480 points on Monday. “Huh,” Peterson said. “I hadn’t heard.”
Long-term investors finished Monday one day closer to their goals.
Analysts expect the news to be no different tomorrow. ”
http://www.fool.com/investing/general/2015/09/09/a-market-update-for-business-investors.aspx
The only thing a potential 25 bps raise means to anyone with an IQ in triple digits is that the FED is acting for absolutely no good reason based on bs.
“How markets tick”
See, this is the Kudlow-Krasting-Cramer” kind of thinking that costs people money.
Companies are important, not markets.
I have no idea how markets tick(Do they really tick?). I do know that my stock portfolio is up over 500% since January of 2009.
That is based on buying two companies at a low price that I knew would survive and prosper after the financial crisis.
EM Wow! 500% in 5ive years – way to go!
Mind telling us what stocks you bought in the dark days of January 2009?
Wells and Chase.
You can find support for that claim in EV’s archives if needed.
Didn’t take Warren Buffet to figure out that the support of the outgoing administration and the incoming administration to save the banks combined with more than $10 Trillion in loans and guarantees from the Fed meant the banking system would be saved regardless of cost.
EM – Congrats – I’m impressed. You should have worked on Wall Street. You’d be a billionaire today.
I remember January of 2009. It was a terrible month. The low low price for the S&P 500 was 2/1/2009. So buying in January was genius. The worst day of the month was memorable. It was Tuesday the 20th, a day after the MLK holiday. It was also the day that Obama was inaugurated. The market for stocks (banks stocks in particular) crashed.
The low price for Chase for the day and the month was 17.70. I assume that you were not watching Obama’s speech, you were trading stocks. And you bought it at the low of the day. (It opened and closed higher) If you did manage to catch that falling knife at the exact right time of the day you would have a 350% gain as of today.
Wells actually hit its low the next morning. It got as low as 13.74, but rallied during the day to close at 16.65. Given that you once again hit the low you would be sitting on a 380% gain. Great day trading!
I tip my hat. You timed it perfectly. And you made a bundle off of TARP.
I got Wells at 9 and Chase around 14.
Tarp meant nothing to either one of these guys. It was sheer PR. The Fed had done what was needed long before Tarp came into play.
BTW,
Those two trades were the first stock moves I had made since 2004, when I got out of the stock market totally.
And I haven’t made one since.