Surprise, surprise: November jobs data released Friday were off-the-chart strong. So strong that markets are struggling to evaluate and price the news, for the moment skeptical of the report, hence little changed.
Shoot, thereās more reaction among politicians and economists.
The White House is preening alongside anyone who has had an optimistic forecast and been frustrated during the last five years, and much chatter about the reportās effect on the Fed.
Estimates for November payrolls had called for a gain a little over 200,000 jobs, but screens all over the world at 6:30AM in New York flashed NOV PAYROLLS PLUS 321,000 and jaws dropped onto keyboards.
More important than the payroll gain (possibly distorted by seasonal adjustments): average hourly wages at last had a good month: up nine cents to $24.66/hour is an annualized gain of 4.4%, more than double the trend going in.
Study other sources on jobs and wages
To evaluate the report, study other brand-new news from November for confirmation. In the first week of each month we get two surveys taken by the Institute for Supply Management. The November results were red hot: The manufacturing ISM arrived at 58.7, and the service-sector twin at 59.3, both a couple of points over forecast. Breakeven is ā50,ā and results near ā60ā historically have triggered quick and unwelcome attention from the Fed.
There is no future in quibbling with those numbers. Hot is hot. However, quibble anyway! There is plenty of that going on inside the Fed today. How hot can our economy run before incomes rise enough to risk inflation?
The wage gain in the payroll report could be a sudden trend-change, but looks like an outlier. The Bureau of Labor Statistics also studies unit labor costs, which track compensation and productivity separately from its employment reports. This week the BLS revised down 2nd quarter compensation to negative 1.5%, and Q3 rose only 1.3% — on net, dead flat for the middle six months of 2014. Do I believe something huge has changed since the end of September?Ā Uh-uh.
There is no change in consumer behavior to reflect suddenly improving incomes. Weāll argue about holiday retail sales until January, but initial reports are tepid. Mortgage rates have fallen close to 4.00% for most borrowers, but no response in purchase applications (remember all that B.S. about housing slowing because mortgage rates had jumped to 4.50%…?).
How can we run so hot without rising incomes? The Left says rapacious behavior by the 1% and business; the right blames all on government.
Impact of Europe and Japan
Both wrong: the outside world is in a disinflationary spiral, the endgame of foolishness in both Europe and Japan, and 20 years of China trying to hold its production costs under downward-spiraling incomes elsewhere.The entire world outside the US is trying now to improve its competitive position by devaluing currency, which will push down the cost of everything we import, but will also push down the incomes of anyone here in the US trying to compete with production over there.
So, in a disinflationary world (if not deflating outright), why is the Fed the only central bank insistent on raising the cost of money soon?
1. Everything in the Fedās history says it must be pre-emptive. It must begin to tighten a year or more before we can see the whites of inflationās eyes.
2. Reports like todayās give the Fed confidence that an eentsy-teentsy tightening runs a low risk of aborting recovery.
3. Risks here matter more than anything over there. Thus the damage done over there by an over-strong dollar… tough.
4. The Fed has been at zero for SIX years. Long time. Especially after having missed the credit bubble, 2002-2007, the Fed fears imbalances that it cannot see. Like a patrol in some God-forsaken village in Mesopotamia, sometimes itās wise to toss a grenade over a wall just to see if hazard has crept close without notice.
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2-year T-note is ALWAYS the Fed-forecaster. Note sharp spike to 0.65% at far right of one-year chart, caused by todayās news. Now an up-trend, although broken every time we get lousy news.
10-year T-note now looks like a bottom, although little damage today. Held so low only by extremely low yields on comparable bonds overseas.
Euro is still sinking, although all European markets are confused by the chasm between ECB jawbone and actions. Probably too little, too late anyway.
Yen/dollar, so up is down in value. This devaluation is last-ditch panic, and no one can know the effect on global trade and markets.
Oil. The Saudis say it will stabilize near $60. No arguing with them — they can make their predictions come true.
Ruble/dollar. 40% of purchasing power gone since summer. Czar Vladimir, wanna-be Stalin, suffers from a weakness afflicting all potentates: nobody is brave enough to bring him bad news. He has misunderstood the financial world. Will he be able to back down? Or, self-cornered, double-down?
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