Employment Report

The Wall Street Journal and others are looking at the headline numbers and reporting that we are seeing another report of moderate employment declines like the last few. But hours worked fell -0.4%, a significantly laarger drop then in the last few months.

Moreover, average hourly earnings were only up 0.1% and average weekly wages actually fell. The year over year gain in average weekly earnings is now 3.1% vs a 4.6% peak in late 2006.

My equation that makes average hourly earnings a function of inflation expectations — a 3 year moving average of the CPI — the unemployment rate and capacity utilization strongly implies that wage growth should continue to weaken. The current difference between the fitted value and the actual value is probably due to the point that falling labor participation is artificially holding the unemployment rate down.
Basically we are in a reverse of Say’s law where falling output leads to falling real wages and falling consumer spending. Hopefully, the tax rebate will cause this downward spiral to reverse.
But that will also require a weakening of inflation so that real wages start to rise. Core inflation is not a problem, so now we just have to wait and see if food and fuel inflation can moderate.

Meanwhile, auto sales fell from 15.1 Million to 14.4 million last month, one of the largest drops in recent years. Moreover, unlike the large monthly drops of a few years ago this sharp drop was not preceded by a pop in sales. It was not just short run noise. It also implies that we are starting the second quarter on a very, very weak note–especially for real PCE.