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Labor pool shrinks but still no wage traction
Simply Economics - December 8, 2017
By Mark Pender, Senior Editor



The bumps have come and gone and the labor market is where it was before the hurricane season, continuing to grow and continuing to absorb what remains of the labor pool. Yet demand for labor isn't one of the week's surprises unlike continuing weakness in wages and an unexpected jump in the nation's trade deficit. But as far as the general outlook goes, economic strength is definitely the call going into the holiday shopping season.


The economy

Overheating may not be the description of the labor market but heating up definitely is. Nonfarm payrolls rose a stronger-than-expected 228,000 in November following a 244,000 rise in October which together more than reverse September's hurricane-depressed 38,000 increase. November's payrolls are led by outsized gains for manufacturing at 31,000, construction at 24,000, and professional services at 46,000. The latter gain is of special note and suggests that employers, struggling to put staff in place to meet demand, are turning to outside help including temporary help which rose a very strong 18,000 for a second straight month. These payroll gains are significant and fully support expectations for a strong fourth-quarter showing for the economy.


But the critical question for the economy is when, perhaps more than whether, this employment growth will soak up what's left of the nation's available labor supply and trigger a jolt higher for wage inflation. The number of unemployed at 6.610 million against total employment of 160.5 million makes for a 17-year low unemployment rate of 4.1 percent. Adding in those who want a job but aren't actively working, the number of unemployed is 11.8 million and, next to October's 11.7 million, marks a cycle low. Without new employees to meet rising demand, existing employees will have to work longer and there's a hint of this in the average workweek which is up 1 tenth to 34.5 hours.


Yet all this demand for labor together with the lack of supply of labor have yet to translate into wage inflation which instead remains subdued. Average hourly earnings, at $26.55, are up only 2.5 percent year-on-year which is better than October but still not much of an improvement. The trend over the last year, as tracked in blue in the graph, is tilting in the wrong direction. Wages have to heat up and give a boost to overall inflation which is likewise trending lower, as tracked in green by the core PCE index. Sagging lines are a head scratcher for Federal Reserve policy makers who, aiming to slow demand amid full employment, risk pulling down inflation even further as they extend their rate-hike sequence.


Policy makers watch the factory sector the closest to guage pivots in the overall economy. Factory orders have had a respectable year, moving to roughly $480 billion per month and near a 3-year high. Year-on-year, orders are up $17 billion or 3.7 percent. Vehicle orders have been showing recent strength and reflect the rush of hurricane-replacement sales yet the big contributor has been capital goods where annual gains are approaching 10 percent. And perhaps an increasing contribution may soon be coming from aircraft which has already had a good year.


Civilian aircraft orders have also been approaching 10 percent growth though they did slow by more than $2 billion in October to $10.6 billion which is about where both orders and shipments have been averaging as seen in the graph. Year-to-date, aircraft orders are at $119.1 billion vs $110.8 billion this time last year. But the year isn't over yet and Boeing's success at November's Dubai air show promises to add new blood to coming reports. Boeing orders totaled 159 aircraft in November vs 64 and 72 in the prior two months for the best showing since 184 in June, a month by the way when factory orders, because of aircraft, surged 3.2 percent. Boeing orders don't always translate neatly into the factory report but they do point to something good for November.


But there is something that wasn't very good in October and that's a deepening trade deficit, at $48.7 billion which makes for an unfavorable fourth-quarter start to net exports. Exports, at $195.9 billion in October, failed to improve while imports, at $244.6 billion, rose a steep 1.6 percent. Price effects for oil, up more than $2 to $47.26 per barrel, are to blame for much of the rise in imports as the crude deficit rose $1.5 billion to $10.7 billion. For exports, both vehicles at $12.6 billion and consumer goods at $16.3 billion declined. The trade gap with China is something else that's not improving, deepening $600 million in October to $35.2 billion for year-to-date red ink of $309.0 billion and a 7.0 percent increase from this time last year.


Imports of consumer goods are in fact the most to blame for the nation's deficit, at $50.0 billion in October for a monthly increase of $800 million. Exports of capital goods are the largest category on the export side and they fell back $1.2 billion to $43.9 billion and reflect a $1.1 billion drop in aircraft where however, as we know, the strength in orders points to better aircraft exports to come. Closing this gap, that is limiting the nation's greatest trade weakness – consumer imports – and expanding the greatest strength – capital goods exports – will be key to improving GDP performance.


Trade isn't the only weak opening for fourth-quarter GDP as inventories are getting off to a slow start as well. Inventories at the wholesale level fell to $605.3 billion in October for a sizable 0.5 percent decline. The draw reflects strong demand for autos where inventories fell 0.7 percent in a second straight decline. Wholesales inventories together with early indications on factory and retail inventories, both of which are down, point to an opening draw for the first month of the fourth quarter. Declining inventories are a negative for GDP but in reality are very welcome during a time of solid expansion such as now, pointing to the need for restocking and to gains for future production and employment.


The decline in inventories, after six months of gains, is really no surprise unlike some other data in the week including inflation expectations which are showing unexpected lift so far in December. Year-ahead inflation expectations posted an outsized and long-awaited rise of 3 tenths to what is still, however, a soft 2.8 percent. Expectations aren't being skewed by gasoline prices which are edging lower this month and which raises the question whether, possibly just possibly, the lift is tied to a jolt higher in wages. Such a jolt, especially for policy hawks at the Fed, is arguably just a question of time and the appearance of such a move could very well come first from inflation expectations in the consumer sentiment report. But the world doesn't turn on a single data point and strength in expectations will have to be confirmed by extending strength as well as confirmation from other indicators such as the Atlanta Fed's business inflation index. Other data in the sentiment report include an auspicious looking jump in the assessment of current conditions, up 2.9 points from November to 115.9 for a 17-year high which is more good news for retailers going into the holidays.


Another holiday hint of strength comes from a rise underway in the revolving credit component of the monthly consumer credit report, gains that perhaps indicate less reluctance among consumers to run up their credit cards. Revolving credit rose $8.3 billion in October to $1.01 trillion for the biggest monthly gain since November last year. Whether this reflects more than just a rising spending appetite but a decline in credit standards may be a question for bank regulators and policy makers but is not one for retailers whose focus is on holiday sales.


Another surprise in the week is a disappointing one and that's an upturn in jobless claims from Puerto Rico. Claims in Puerto Rico had fallen sharply in the prior week, down nearly 4,000 to the 3,000 level, but rose back up in the December 2 week to 7,115. The Labor Department is warning that backlogged claims are still piled up and that the claims process has not yet returned to normal. Despite being inflated by Puerto Rico, total initial claims are very favorable, down 2,000 in the latest data to a lower-than-expected 236,000.


Markets: Buddy can you spare a bitcoin?

Bitcoin is crowding out other news in the financial markets, posting gains that redefine the word parabolic. Up 24 percent in the latest week alone, bitcoin is becoming an imposing poster child for market excess and is also becoming perhaps an emerging risk to banking and market stability. The question of excess in the stock market, let alone bitcoin, hasn't really come up yet in the Fed's deliberations but these issues have to be addressed in any meaningful assessment of the economy. Watch for the code word "asset prices" to begin popping up more in Fedspeak including perhaps in the coming week's meeting of the Federal Open Market Committee where a rate hike, based on the labor market alone and apart from market excesses, is universally expected.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 1-Dec-17 8-Dec-17 Change Change
DJIA 19,762.60 24,231.59 24,329.16 23.1% 0.4%
S&P 500 2,238.83 2,642.22 2,651.50 18.4% 0.4%
Nasdaq Composite 5,383.12 6,847.59 6,840.08 27.1% -0.1%
Crude Oil, WTI ($/barrel) $53.71 $58.35 $57.35 6.8% -1.7%
Gold (COMEX) ($/ounce) $1,152.50 $1,283.20 $1,250.40 8.5% -2.6%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.77% 1.80% 59 bp 3 bp
10-Year Treasury Yield 2.45% 2.37% 2.38% –7 bp 1 bp
Dollar Index 102.26 92.9 93.9 -8.2% 1.1%


The bottom line

Tax stimulus, if passed, would be boosting an economy at full employment which probably means that business expansion will be increasingly limited by a lack of workers, an unwanted dearth that several reports including the Fed's Beige Book have been warning about for the last several months. An absence of workers will raise demand for immigrants and put the premium on bringing back what remains of the discouraged workforce. Another alternative perhaps is that we all work harder and raise our productivity which has been lagging badly anyway.


Week of December 11 to December 15

The FOMC is the week's highlight and is expected to be headlined by a rate hike and perhaps warnings over the risks of inflation and asset bubbles. Wage inflation will be the focus of the JOLTS report on Monday amid high levels of job openings and lagging rates of hiring. The week's biggest reading on inflation will come on Wednesday with the CPI report where, however, the core is once again expected to come in flat. The end of the week will see major releases with November retail sales on Thursday and the first definitive information on holiday shopping and industrial production on Friday and the first hard data on the November factory sector.




JOLTS: Job Openings for October

Consensus Forecast: 6.100 million

Consensus Range: 6.050 to 6.110 million


At 4.1 percent, the unemployment rate is low and consistent with full employment which is also the signal from the JOLTS report where job openings have been running very strong, over 6 million at 6.093 million in September. Econoday's consensus for October job openings is 6.100 million.




Small Business Optimism Index for November

Consensus Forecast: 104.2

Consensus Range: 104.0 to 105.9


The small business optimism index has been holding near expansion highs boosted by strong confidence in the economic outlook and significant plans to increase capital outlays. Econoday's call for November is 104.2 vs 103.8 in October.


PPI-FD for November

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.5%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%


Inflation for wholesale trade services, which is considered an advanced indication for wider price pressures ahead, has been very evident in the last two producer price reports, helping both the overall headline and the less food and energy reading post 0.4 percent gains each in both October and September. Prices for legal services and healthcare showed special traction in October. A notch less strength is the call for November as forecasters see the PPI-FD rising 0.3 percent, the less food and energy rate up 0.2 percent, and up 0.3 percent for less food, energy and trade services.


Treasury Budget for October

Consensus Forecast: -$134.0 billion

Consensus Range: -$146.0 to -$74.1 billion


The Treasury opened fiscal year 2018 with an October budget deficit of $63.2 billion, 40 percent larger than the $45.8 billion deficit in October last year. The larger deficit reflected an 11.6 percent yearly increase in outlays to $298.6 billion that outpaced a 6.2 percent increase in receipts to $235.3 billion. The Econoday consensus for November's Treasury deficit is $134.0 billion.




Consumer Price Index for November

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.2% to 0.5%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.2%

Consensus Range: 2.0% to 2.3%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.8%

Consensus Range: 1.8% to 2.0%


Aside from hurricane-related swings, consumer inflation has been fundamentally flat including October when the monthly rate rose only 0.1 percent while the year-on-year rate fell 2 tenths to 2.0 percent. The core, which excludes food and  energy, rose 0.2 percent with this yearly rate inching up 1 tenth to 1.8 percent. Wireless service prices, which have fallen steeply this year, have been rebounding in recent months but have been offset by weak prices for vehicles. For November, forecasters see the overall CPI rising 0.4 percent with the less food & energy rate at 0.2 percent. Year-on-year, the CPI is seen rising 2.2 percent with the core at 1.8 percent.


Federal Funds Target for December 12 & 13 Meeting

Consensus Forecast, Midpoint: 1.375%

Consensus Range: 1.25% to 1.50%


The economy is at full employment and the Federal Open Market Committee appears guaranteed to raise its federal funds target for a third time as planned this year. Econoday's panelists all see the target rising 25 basis points to a range of 1.25 to 1.50 percent. Quarterly FOMC forecasts will be of special interest and whether they reflect any early expectations for tax cut stimulus.




Initial Jobless Claims for December  week

Consensus Forecast: 239,000

Consensus Range: 225,000 to 240,000


Initial claims are expected to come in at 239,000 in the December 9 week vs 236,000 in the December 2 week. After coming down sharply in the prior week, claims from Puerto Rico rose sharply to over 7,000 with the Labor Department warning of remaining backlog from Hurricane Maria.


Retail Sales for November

Consensus Forecast: 0.3%

Consensus Range: 0.2% to 0.5%


Retail Sales Ex-Autos

Consensus Forecast: 0.7%

Consensus Range: 0.5% to 0.9%


Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.6%


Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.6%


After jumping on hurricane-driven gains for autos and gas, retail sales settled back to earth in October with only a 0.2 percent gain and mostly moderate details throughout. For November, unit auto sales slowed which points to trouble for the motor vehicle component. Special interest will be paid to department store and nonstore data to measure the success of Black Friday and Cyber Monday. Retail sales in November are expected to rise 0.3 percent with ex-auto sales much higher at 0.7 percent. Two core readings -- less auto & gas and control group sales -- are both expected to post solid increases of 0.4 percent.


Import Prices for November

Consensus Forecast, Month-to-Month Change: 0.7%

Consensus Range: 0.3% to 1.0%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 1.0%


Cross border prices, like other inflation readings, have been flat, up only 0.2 percent for October imports and unchanged for October exports. Prices for petroleum and for agricultural products both rose sharply in October but couldn't help the month's overall totals which were once again held back by weakness in finished prices. But Econoday's consensus for November does call for an oil effect on import prices, where the consensus is calling for a 0.7 percent gain, with export prices at a moderate 0.3 percent.


Business Inventories for October

Consensus Forecast,  Month-to-Month Change: -0.1%

Consensus Range: -0.2% to 0.2%


Business inventories have been climbing solidly in line with underlining sales but are expected to ease back in October. Lower inventories during a time of rising economic demand point to the need for restocking and are a plus for employment and production. Forecasters see a 0.1 percent draw for October inventories.




Empire State Index for December

Consensus Forecast: 19.4

Consensus Range: 14.7 to 25.0


Empire State slowed in November in what was a welcome result given this year's long run of unsustainable strength in this report. Yet readings were still very strong with the headline index coming in at 19.4 with December's consensus also at 19.4.


Industrial Production for November

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.5%


Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.5%


Capacity Utilization Rate

Consensus Forecast: 77.2%

Consensus Range: 76.9% to 77.3%


Though choppy through the hurricane season, industrial production snapped back with a 0.9 percent gain in October while the manufacturing component, after posting a solid September gain, surged 1.3 percent. Forecasters see easing in November with the consensus gain  at 0.3 percent for both total production and manufacturing production.


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