'Resource Utilization' - The Root of the Fed's Motivation

Remember all the way back to last Friday, April 6th, 2007? You know, when the U.S. economy was doing absolutely stellar and the jobs report made everyone feel all warm and oozy like a Tootsie Roll left in your pocket on a hot August day? Ah.... how soon we forget. Despite the negative movements in the U.S. dollar because of bad trade policies, the U.S. economy is still doing well.

The question remains, however: Will we be seeing more interest rates in the future?

We're going to get a glimpse at the minutes to the last Fed meeting yesterday. This will likely give us an idea as to what to expect in future for the greenback.

Here's a chart that really puts everything into perspective. This is Real Personal Consumption Expenditures (Red) vs. Real Average Hourly Earnings (blue) from 1965 - present:

What you are seeing is the correlation between how the rate of growth in Average Hourly Earnings translates into consumption. The correlation is very strong save for a couple of historical economic anomalies, such as smack dead center of the the chart when consumption rose heavily and earnings did not. That would be the 1981 Reagan Tax cuts that went into effect in 1983. People had more to spend, but it wasn't from their paychecks. Then, if we look at the Bush tax cuts (around 2001), you see consumption falling. Earnings were falling, but consumption fell even more. Kinda limp, actually. Shows you how effective Bush is as a President. Perhaps he should look into some of those enhancement pills he gets in his email junk folder.

We digress.

Looking at the very end of the chart, we see earnings clearly shooting to the upside. My take: Americans are as likely to change their negative savings rate habits as quickly as those enhancement pills are going to give the men of this country the necessary stamina that they promote. Read: Americans don't save and won't start any time soon.

The next question is: If consumption looks set to push higher, is there an effect on employment?

How astute of you to ask:

This is the rate of growth in Employment (Blue) vs. the rate of growth in Consumption (Red). Yes, Tom, there is clearly a lag as to consumption vs. employment. But, where we differ significantly is that looking at the above chart, I believe that the U.S. consumer is about to kick it up a few notches with some red hot chili flake. Bam! So, I also believe that we're going to see employment continue beyond its 4.4% rate. It's only natural as the charts show.

What's preventing this scenario from working out? I bet if I were stop here and take a look at the Fed minutes, I'll find that answer. The real root of the Fed's motivation right now is resource utilization.

Here are the two charts that help me get a feel as to where we are heading in that department:

As long as employment cost remains stable, we're likely to see the "resource utilization" phrase that is being used as the cautionary tone within the Fed statements turn out to be benign. Also, if we are to see productivity keep it's head above water, then this sort of erases employment cost fears.

This being said, I can see the Fed beating a drum, but nothing more (with the information I have right now). Interest rates may sit right where they are for a while. The dollar, bonds, and the equity markets may not.