MacroScope

U.S. hiring may be rebounding, but wage growth is not

AThe U.S. job market has finally turned a corner. What is remarkable is that it has taken so long.

Companies have finally begun taking on staff in consistently greater numbers, half a decade after the end of a deep recession brought on by one of the most punishing financial crises in history.

What companies haven’t been doing yet is offering consistently greater pay.

That means an urge to start bringing forward expectations for when the U.S. Federal Reserve will begin raising interest rates might be premature.

Right now, the consensus view is that the federal funds rate will go up in about a year. Some banks who thought it might be late next year are saying it might come a bit earlier.

A market-dependent Fed?

It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.

If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.

Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:

Say it with confidence: Consumer surveys as a leading indicator of jobs

It turns out people are better employment forecasters than economists. A report from New York Fed economists finds that confidence measures gleaned from consumer surveys are very tightly correlated with the path of U.S. employment.

The paper offers some illustrative charts that make a rather convincing case.

The chart below plots the Present Situation Index against the unemployment rate, whose scale is inverted so that high levels represent strong labor market conditions (low unemployment) and vice versa. One readily apparent feature is that the two series move together very closely throughout the period and, most notably, during all five of the recessions since 1977. It’s hard to tell from inspecting the chart, but the highest correlation (0.89) occurs at a two-month lead; that is, the Present Situation Index is even more strongly correlated with the unemployment rate two months into the future than it is with the concurrent rate.

The next chart looks at the relationship between changes in this index and payroll job growth – both over twelve-month intervals. This measure of employment is based on a different survey than the survey for the unemployment rate, but payroll employment is typically growing when unemployment is declining and vice versa. Once again, it’s very apparent that the two measures move closely together, and again formal analysis reveals that the Present Situation Index tends to foreshadow movements in employment by a couple of months. In particular, twelve-month changes in the index are most highly correlated with twelve-month job growth four months into the future – the correlation is 0.83.

Why the mediocre U.S. July jobs report was worse than it looked

U.S. economists were generally disappointed with the net gain of 162,000 jobs last month, well below forecasts around 180,000 and market talk of a possible reading above 200,000. The jobless rate did fall to 7.4 percent from 7.6 percent, but labor force participation also resumed its recent descent.

Thomas Lam, chief G3 economist at OSK-DMG/RHB, says the underlying details of the report make employment conditions actually look worse than at first glance. Here’s why:

The most striking aspect of the Jul employment report is that details of the release appear generally weaker than the uninspiring headlines figures.  The nonfarm payrolls print of 162k in Jul, while modestly softer than expectations, was accompanied by narrower gains in private payrolls (the weakest 1-month and 3-month diffusion data since Aug & Sep 2012), and net downward revisions of 26k in prior months (-19k in May and -7k in Jun, confined within private employment).  Moreover, the employment and workweek details from the Jul release imply that real GDP growth in early Q3 2013 might be tracking weaker than the advance Q2 2013 print of 1.7%.

Obama’s second chance to reshape the Fed

Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.

The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.

Elizabeth Duke, the last George W. Bush appointee, is already on her way out. So is Sarah Bloom Raskin, who after a relatively short stint at the board is moving to the Treasury, to be Jack Lew’s Deputy Secretary. Then there’s the awkward suspicion that, if Obama passes up Fed Vice Chair Janet Yellen, by far the favorite for the top spot, she will also step down after a long career in the Federal Reserve system, including many years as head of the San Francisco Fed.

U.S. job openings rise, but nobody’s hiring?

It’s a good news, bad news story: The U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover (JOLTS) survey in June showed an increase in job openings, but a decline in new hires. The ratio of unemployed Americans to each open job fell in June to its lowest level in over four years.

The number of job separations (government code for layoffs) also fell, mainly due to fewer layoffs. The June numbers suggest some retracing of the gains of the previous month or two, but does not erase them, says Stone & McCarthy Research Associates economic analyst Terry Sheehan.

Job openings rose by 29,000 in June, but the number of new hires fell by 289,000. Simultaneously, the number of job separations also fell 300,000, mainly on declines in layoffs which fell 215,000.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment:

U.S. minimum wage hike would offer short-term economic stimulus: Chicago Fed

President Barack Obama proposed a hike in the U.S. minimum wage during his State of the Union Address in February. Since then, we haven’t really heard very much about the proposal. That’s too bad for a U.S. economy that could still use a bit of a boost, according to new research.

A paper from the Chicago Fed finds that, while there might be little impact on long-term growth prospects from a higher minimum wage, the measure could add as much as 0.3 percentage point to gross domestic product in the short-run. That’s not insignificant for an economy that expanded at a soft annualized rate of just 1.1 percent over the last two quarters.

This is how the authors summarize their findings:

A federal minimum wage hike would boost the real income and spending of minimum wage households. The impact could be sufficient to offset increasing  consumer prices and declining real spending by most non-minimum-wage households and, therefore, lead to an increase in aggregate household spending. The authors calculate that a $1.75 hike in the hourly federal minimum wage could increase the level of real gross domestic product (GDP) by up to 0.3 percentage points in the near term, but with virtually no effect in the long term.

Broken (record) jobless data: Euro zone unemployment stuck at all-time high

Surprise! Euro zone unemployment was stuck at record high of 12.2 percent in May, with the number of jobless quickly climbing towards 20 million. Still, as accustomed to grim job market headlines from Europe as the world has become, it is worth perusing through the Eurostat release for some of the nuances in the figures.

For one thing, as Matthew Phillips notes, Spain’s unemployment crisis is now officially more dire than Greece’s – and that’s saying something.

Also, the figures remind us just how disparate conditions are across different parts of the currency union. While Spanish and Greek unemployment is hovering just below 27 percent, the jobless rate in Austria, the region’s lowest, is 4.7 percent.