What a difference 0.1% makes

Five weeks ago, when the January employment report was released, the stock market took a dive, supposedly triggered by a wage increase 50% above expectations (0.3% versus 0.2% expected).

Today´s release, which showed a robust employment gain of 313 thousand, more than 50% above the 200 thousand expected, but with wage growth coming in 50% below expectations (0.1% versus 0.2% expected) was accompanied by a strong rise in the stock market.

Meanwhile Fed BoG members Powell and Brainard mouthed strong words for more than three rate hikes this year. Powell mentioned, “avoid overheating” while Brainard said “winds” had changed from “Head” to “Tail”.

FOMC member Kashkari, on the “far right tail” of “dovish” members, said after today´s report:

We keep saying we are at max employment and then all these people choose to work. It suggests we weren’t really at max employment.

There are those who think The Employment Report Does Little to Defray the Likelihood of Higher Wage Growth, appealing to “historically robust” “leading indicators” for wage growth, among them the unemployment rate itself (plus small-business hiring plans and the output gap).

While those indicators may have been “prescient” when the economy was functioning “normally”, they may be useless in a “depressed economy” like the one we´ve had for almost 10 years now, which is characterized by the total absence of anything that could be called a “recovery”.

For the past 23 years, core PCE inflation has averaged 1.6% (1.75% for the past 30). Inflation, therefore, has not been an issue. The chart shows wage growth (Average Hourly Earnings for production & non-supervisory workers) for those times when unemployment was below and above 5%.

It appears this is a new reality altogether. And this new reality is well explained by the much lower growth of nominal spending that came on the heals of a deep drop in the absolute level of spending which ocurred during the “Great Recession”.

Therefore, by putting so much weight on the unemployment rate and on a supposed inflationary increase in wages, something that hasn´t been a factor for at least three decades, with the new mantra, introduced by Brainard, being that “too low” unemployment, if it does not pull inflation, will stoke financial imbalances, the Fed will likely help derail the economy.


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