Jobs, jobs, jobs (and no wage inflation)

The Week Ending Friday March 9th 2018

A lot of noise was generated about Trump’s steel tariffs and a potential meeting with the North Korean dictator but moved markets very little. The big event turned out to be the February payrolls data. Supposedly weaker than expected wage growth was accompanied by strong job creation than expected. A goldilocks scenario of higher real growth with little inflation risk.

Equities surged yet the USD and bonds remained steady. Neel Kashkari’s simple, common sense, viewpoint seemed to be the one the markets followed despite some foolishly hawkish rhetoric from Powell and Brainard:

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.

Nominal growth is picking up

While many commentators focused on Average Hourly Earnings the actual measure of what people actually earn, Average Weekly Earnings (Average Hourly Earnings x Average Weekly Hours) rose reasonably nicely at 3.1%. Why people look at something as artificial as Average Hourly Earnings is mysterious when only just over half of the US labor force is even paid hourly.

Also, with a rising total number of workers employed, NGDP will be moving up reasonably strongly in 2018Q1. This is because the bulk of NGDP is made up of the total wage bill, ie Average Weekly Earnings growth + the employed labor force growth. As of February 2018 the YoY growth in the labor force was 1.7% – so the total wage bill will be rising at nearly 5%. Not too bad. Long may it continue. The question is: what does the new Fed want? And here we don’t really know. The new Fed Chair and a Brainard, previously a dove, seem scared but is it just rhetoric, as markets currently believe?

Markets remain optimistic

Our own NGDP Forecast is a bit volatile at the moment but seems to be holding up a new highs of 4.4%. As we said, equities surged back to near the record highs after the jobs report. The USD and bonds were unchanged, indicating to us that markets do not think the Fed will change its current course of three to four rate rises this year. Commodities like oil and copper rose after the jobs report, though still remain trendless. Five-year break-even inflation rates continued to drift higher and now seem set to stay above 2% for the first time in five years.

Unless the bond curve falls back down again then we must remain positive that the economy, or rather economic expectations, can manage to cope with the rate rises projected by the Fed and markets during 2018.


Last week was light in terms of data apart from the payrolls. The one survey was the ISM Non-Manufacturing PMI for February was much better than expected while the January Factory Orders data point was weaker than expected, in fact negative.

Next week is active for data and surveys. We get data for the expenditure-derived version of NGDP with February retail sales and the CPI figures. The latter have a chance to spook markets but will likely be dull given the Fed tightening bias. March consumer and business surveys begin to be released as well as the more backward-looking Industrial Production for February.

The markets may really begin to focus on the following week’s FOMC meeting, Powell’s first as Chairman. The Wednesday 21st March announcement on rates, a rise of 25bps is nailed on, will be accompanied by the first of the years quarterly projections of rates, inflation and unemployment.


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