Why I Don't Buy The 4.5% Unemployment Rate

Where is the wage pressure? That was the question on my mind as we awaited Friday's NFP. Thursday saw a stronger than expected ADP Report, which whacked bonds and sent yields back over the 5% level; The 10 year closed at 5.144%. A prime mover: growth in service industries, which accelerated to the fastest pace in 14 months in June.

The Fed will be closely watching the data for signs that Average Earnings are rising, as a gauge of potential inflation.

Which brings us back to our original point: If Unemployment is actually as low as it has been reported by BLS, then there is no slack in the labor market. We have a situation where demand is outstripping supply. In the Oil market, that sends prices higher. In Agricultural commodities, the same thing occurs. Indeed, in every market I can think of, when Demand is greater than Supply, prices rise. That's Econ 101: prices should be rising robustly in that environment. 

Yet we see little evidence that wages and salaries are moving appreciably higher. Outside of bonuses and stock options, most wages have been pretty stagnant. For most of the past 4 years, they had been falling on a relative basis to inflation. It's only the past few quarters or so that hourly wages have risen at the rate of inflation or better.

A sign of a slack labor market is sluggish wage gains. Which is pretty much what we have been seeing.

The WSJ's Ahead of the Tape column looks at the same issue, and asks a different question:

The Federal Reserve says measures of inflation have improved lately. But it's still worried that there's little slack in the economy, which could ultimately push prices and interest rates higher. A key measure of slack is the unemployment rate. When it gets very low, it can be a signal of labor shortages that create wage and price pressures.

The labor market appears to have weakened a bit. Through May of this year, surveys of U.S. businesses show they added an average of 133,000 nonfarm jobs per month to their payrolls, according to the Labor Department, down from last year's average of 189,000.

Yet even though job growth has been slowing, the unemployment rate isn't budging. It is expected to come in at a relatively low 4.5% for June, around the level it's been at for nine months. This is all the more striking because the survey of households that the Labor Department uses to calculate the unemployment rate shows especially paltry employment gains through May this year. Those paltry gains suggest the unemployment rate should be rising.

His take is that since NFP gains have been on the low side, we should see unemployment tick up. My view is that all these Quarters of low unemployment should have sent wages skyrocketing, late 1990s style.

Yet neither has happened.  I cannot help but wonder why . . . 

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Where's the wage pressure?

chart courtesy of economagic

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A few other things to watch for:

1) ADP data showed private sector job creation of 150k. That is the number of total NFP the economy needs to merely keep up with population growth and immigration each month. Watch for a celebration of mere population growth.

2) The June number enjoys a healthy Birth Death adjustment.  Bill King noted that "Last June the BLS created 166,000 (175k Prelim) Net B/D Model jobs out of thin air."

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UPDATE: July 6, 2007 8:39am

WSJ:

"Nonfarm payrolls increased 132,000 in June, after
swelling 190,000 in May and 122,000 in April, the Labor Department said Friday. Previous reports showed job growth of just 157,000 in May and 80,000 in April. Monthly job growth has averaged a robust 145,000 so far this year. The unemployment rate was unchanged last month at 4.5%.

Average hourly earnings increased $0.06, or 0.3%, to $17.38. That was up 3.9% from a year earlier, suggesting tight labor markets still aren't putting much pressure on labor costs."

A few notable data points from the release:

• B/D Adjustment was +156k

• Education and health services were strong at +59k, as was Leisure and hospitality +39k and Government +40k

• Construction employment was up by 12,000  (WTF?)

• Professional and business services were down 9k

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Sources:
ADP Employer Services Says U.S. Added 150,000 Jobs
Shobhana Chandra
Bloomberg, July 5 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ.DttbnfLwQ&

Help Wanted: A Labor Report With Some Slack
Justin Lahart
WSJ, July 6, 2007; Page C1
http://online.wsj.com/article/SB118368257096758684.html

CES Net Birth/Death Model 
http://www.bls.gov/web/cesbd.htm

Employment Situation
http://www.bls.gov/news.release/empsit.toc.htm

Comments

[Paul Meisel:]

Barry, I think I have one explanation.

Here in the breadbasket and rust belt, the kinds of jobs that are getting outsourced are relatively high wage and benefit jobs -- industrial, with benefits and old-fashioned defined benefit retirement plans -- full time experienced teachers at the top of their wage scale -- union-represented trades and craftsmen.

The kinds of jobs being created -- service and retail -- small, low overhead industrial with 401Ks and some but less luxo benefits -- new bottom of the scale and part time teachers -- non-unionized trades and craftsmen.

It is hard to hire anyone here at less than $10 an hour. It is very easy at over $20 an hour. The kinds of margins these businesses make force the employment downscale.

I wish I had statistics to support it -- I can't find any parsed that way -- but that is my observation of what I see and hear.

2007 Jul 08 09:03 AM

[rickrents:]

The article is correct!!! All the illegal immigrants have been holding back wages for years. It's not that Americans won't do the jobs it's they won't do them for minimum wages.

2007 Jul 08 09:27 AM

[David Lentz:]

"they won't do them for minimum wages"

"Won't" or "Can't"?

Is it possible to live on a minimum wage, there being a finite number of hours one can work during a week?

OTOH, if illegals manage to do so, then it must be possible. Are the conditions that illegal immigrants live under so poor that no American would choose to do so?

Maybe. We need to examine the life styles of illegals and see if any sane American would choose to live that life.

No doubt in my mind that the rise of capitalism and globalization have supplied such an increase in the available work force that there is a very effective cap on wages.

I await the Indian real estate agent who conducts the entire sale remotely from the other side of the planet, complete with title search and navigating the paper jungle of American real estate (mild compared to the byzantine nature of Indian bureaucracies), for only 2% instead of the 6% that is the norm here.

As globalization expands, more and more jobs that were previously considered "safe" will fall to offshore competition. I think that plumbers are still safe.

In the not-too-distant future, cheap human labor will be replaced by robotic labor, and economies will have to adjust to the problem of too many workers and not enough jobs. This does not bode well for payroll-supported programs like Social Security.

2007 Jul 08 12:08 PM

[Steven R. S...:]

I guess the hundreds of thousands of "self employed" real estate agents, and mortgage agents, notary, escrow, and appraisers do not count in the numbers being used.

Literally there is a phantom workforce that is not accounted for in the way numbers are reported. If all we use is Unemployment claims, then no self employed peoples are counted at all. And, if someones Unemplyment ran out and they are still out of work, they do not count either.

Put these two things in the formula and Unemployment is much higher than what is beinig reported. But, keep it a secret from the Feds, we would not want it to effect their reporting system or cause any angst to be directed our way.

2007 Jul 08 11:56 AM

[Paul Meisel:]

Your point is excellent. The system has no effective way to account for changes in self-employed people, or their sever underemployment due to lack of business.

I chuckle a little at the conspiracy theorists. Considering how long it takes our bureaucracies to adjust to other, more pressing issues, like attacks, floods, and overseas conflicts, is it surprising that a system developed when most Americans worked in industry has not been well adapted for our changing economy? I don't think the statistics are cooked.... they are just not as relevant as they used to be.

2007 Jul 09 08:18 AM

[wixeywaxy:]

The facts that support that good jobs are shrinking is no doubt being surpressed and any twist to support the opposite position are expounded. That's the politically correct message and it's smart to be cynical when the message doesn't fit the big picture. Globalization, which isn't going to go away, is certaninly making the price of labor for the unskilled cheaper. If you want your children to have a standard of living in keeping with what we have come to expect, you had better be sure they learn a skill that is valuable in an economy that is not built on manufacturing. If they go to college, they had better not get sucked into a career path for which there is need for only very few people. Unfortunately too many are encouraged to follow psychology, and similar fields the basis of which is currently popular opinions and from whom every employeer gets a bushel basket full of resumes every day.

2007 Jul 08 12:04 PM

[Jim Glazen:]

All government economic statistics are cooked and aren't worth analyzing or interpreting. All you need to do is to look at the revenues and earnings for publicly traded corporations. They are still growing rapidly. Nike just reported stellar results with accelerating futures orders.

We are in a global inflationary boom with low interest rates. That's very supportive of continued stock price appreciation and brisk economic activity.

2007 Jul 08 01:35 PM

[Thomas Melillo:]

Hello Jim, I have suspected for quite some time that the government economic statistics are being cooked, but I thought it was just me thinking the absurd. I guess Im not alone in thinking this.

2007 Jul 09 07:26 AM

[LeeCarlson:]

A lot of good comments above. One other thing is that people just don't have only one job anymore because they can't survive on that, If they have kids going to school and a car payment plus rent, or mtg. then, 2 jobs are a necessity in todays economy ! I may be an old geezer but in 1969 I bought a new car, a new home and a new boat and ,yes my wife worked but we were, at that time on the bottom rungs of
the pay scale. And had no kids. In todays market, , even with 2 people working, or one person w/ 2 jobs, it's very tough to make a living and have anything left over. Why do you think Wal Mart is staffed up with people in their 70's ? People that age should be retired, and relaxing, but can't afford to stop working.
It's a far different economy today than 30-40 years ago. The Gov. especially,..doesn't like to tell how many people have 2 jobs or how many people over 70 are still working. It ain't good for the elected officials resumes !
To top it off, with the way the gov. is allowing imports and the USA not being able to sell in the overseas markets or to be able to compeat with the Chinese labor mkt. the dollar is fast becomming weaker and weaker to the point that the Canadian dollar is almost on a par with the American Dollar, and the Euro which started out on a par with the US Dollar is now way above the US Dollar and the Oil suppliers are
getting smart and starting to price oil according to the Euro....That answers why gas. prices are so high !
Have the Legislators in Wash. D.C. screwed up the economy ?? Yeah,...big time !! And for a long time !!
LC

2007 Jul 08 11:15 PM

[buds:]

Same with me I don't buy the 4.5% employment rate either.
Since the price of oil climbs as high as $75 (Brent) and no sign of
weakness I wonder how stock price still goes up, seems people don't
fear anything but profit. I trully hold bearish positon since index
(SP 500 & DOW in the year of 2007)
never break out their positions in the year of 2000

2007 Jul 09 08:55 AM