Economic Insights - May 14 - 18, 2018
- A dearth of employees? Labor markets in the United States, the Eurozone, and Japan are tightening rapidly and wage gains are beginning to pick up. The outlook is for more of the same.
- The Fed put has a lower strike price: Investors believed that Alan Greenspan as Federal Reserve (Fed) Chair would rescue the stock market from any serious correction with easier policy. That may not be true with the new Fed.
A dearth of employees?
Almost everyone needs workers. One of the most underreported news items of the last few months is how tight labor markets have become in developed countries: the United States, the Eurozone, and Japan. The current synchronized world economic expansion began in March 2016, after the U.S. dollar peaked and commodity prices hit bottom. It kept gathering steam all through 2017 and is still going strong today, albeit with modest deceleration outside the United States. Job markets have tightened most everywhere and wage growth is surely on the cusp of picking up substantially. In some places, it already is.
The jobless rate is a miniscule 2.5%, the second lowest since June 1993. There are 1.59 job openings for every job applicant, the most since January 1974. Total employment in Japan surged 480,000 in March alone, and shot up 1.41 million in the first quarter. That’s equivalent to 3.62 million new jobs in the United States, an unheard-of number for three months. Total employment in Japan was 3% higher in March than the prior year; the last time jobs jumped that much was 1973. It’s astounding for a country with a declining population. It’s happening from rising participation. The number of females with jobs in March soared 4.8% over March 2017; female participation in the labor force is 71.4%, above the 67.8% in the United States. The number of workers over age 65 has risen 7.4% over the last five years.
Wage gains in Japan are already responding to labor shortages; first-quarter nominal compensation jumped 3.6% annual rate over the fourth quarter, and 3.1% over the prior year, the fastest pace in 21 years. Wage inflation in March was 2.1% over the prior year, versus 1% for all of 2017. And young people are being hired. According to Nikkei Asian Review, 98.0% of college graduates have landed jobs at the beginning of the fiscal year in April; and 99.7% of Tokyo high school graduates have job offers, both the highest since 1994.
The portion of businesses in the Euro area that report worker shortages limiting production is a record level, and three times the average of the last 17 years. The jobless rate is 8.5%, the lowest since December 2008. Large German labor unions covering several million workers have negotiated wage gains in excess of 3%, the best in years.
The United States:
Nearly everyone that wants a job and is qualified can find one. The overall jobless rate is 3.9%, the lowest since 2000. The jobless rate for African-Americans and Hispanics in April was 6.0% and 4.8%, respectively, both record lows. Surveys of U.S. small businesses (National Federation of Independent Business or NFIB) show near-record job openings and plans to raise compensation. The Job Opening and Labor Turnover Survey for March reported 6.55 million job openings, a record for the series that began in 2000; that’s one job opening for every unemployed person, also a record.
The strong demand for workers by small business is being spurred by robust profits; the portion of NFIB respondents that reported good earnings was a record high for the series in April. Some wage series show acceleration: The Employment Cost Index in the first quarter was up 2.7% over the prior year, the most since 2009. The most watched series, average hourly earnings in the monthly payroll report was weaker in April, but the six-month smoothing is still up 2.7% over the prior six-month average. The Atlanta Fed Wage Tracker series, which accounts for shifts in job composition, has median wage growth at 3.3%.
If the U.S. expansion lasts beyond June 2019, which we surely expect, it will be the longest on record, surpassing the 10 years after March 1991. Robust capital spending and healthy confidence will keep job growth solid, pulling more and more people back into the labor force. We look for the jobless rate to fall into the mid 3% range by year-end, and for gains in average hourly earnings to hit 3% by fall.
The Fed put has a lower strike price
Recall the belief under former Federal Reserve (Fed) Chair Alan Greenspan that the Fed carried a stock market put, i.e., any serious equity turbulence would be rescued by easier policy from the Fed. What about today? It may be there, but the strike price is much lower. From the top tick of the S&P 500 Index on January 26, to the bottom on February 9 just 10 days later, the Index lost 11.8%. Since then there’s been a lot of churning, and rallies followed by new downdrafts with the Index still 5.7% below the January high as of the May 18 close. In the four months of heightened volatility since the top, two issues stand out. First, long-term U.S. treasury yields went up, not down. Yields on 10-year treasury bonds were 2.66% at the January high and closed Friday at 3.08%, up 0.42%, the first correction since the financial crisis where yields did not drop. It’s also the first where faltering growth was not the worry.
This suggests that the correction was not caused by the headlines discussed by the chattering classes: not about fast wage growth in January, trade tensions, nor military conflict in North Korea or Iran. Yes, those were the instant explanations in the financial press. But, the underlying cause was surely that the economic backdrop had dramatically changed from the ugly economic morass from mid-2007 to mid-2016. World growth is robust; the crises are over; policy is less accommodative. That means that the super-low interest rates that drove the long U.S. equity rally from March 2009 are going away. Interest rates are returning to normal; markets and investors are coming to grips with that realization.
The second issue:
There has been nary a peep out of members of the Fed Board of Governors showing any concern about the stock market downdrafts since January. In fact, incoming New York Fed President Williams suggested less transparency by questioning the value of forward guidance. That was a policy tool started by former Fed Chair Ben Bernanke to tell investors that rates would stay low for a long time, putting down-pressure on long-term yields. A similar idea was floated by St. Louis Fed President Bullard to eliminate the member estimates of the future fed funds rate, fondly known to pundits as the Dot-Plot.
So: little concern expressed about market corrections, a rising U.S. dollar, higher long-term bond yields or the consequent fall in emerging market currencies; plus, suggestions for less transparency from the Federal Reserve. Reading between the lines from the new Fed suggests that whatever put the Fed may have to rescue the stock market in the future, has a much lower strike price than in the past.
Note: We will not have an Economic Insights next week. Please look for the next update on June 5.