Jones Lang LaSalle
Wage growth could fuel the bears
By Rex Nutting, MarketWatch
Last Update: 3:01 AM ET Apr 1, 2006
WASHINGTON (MarketWatch) -- The Federal Reserve is watching the data carefully these days, but it's not watching every piece of data equally.
The always-important monthly jobs report has gained even more importance as the Fed tries to finesse a soft landing in the economy, one with moderate growth and moderate inflation.
When the Federal Open Market Committee says that "possible increases in resource utilization ... have the potential to add to inflation pressures," it's talking mostly about jobs and wages.
Tight labor markets could lead to higher wages, so the theory goes. And higher wages could allow potential inflation to turn into actual inflation.
"Any sign of further acceleration in earnings growth will be interpreted by some to mean the FOMC will have to take the Fed funds rate above 5%," said Stu Hoffman, chief economist for PNC
"A stronger-than-expected jobs report next week would provide further fuel for the bond bears," Hoffman said. The bears pushed up long-term interest rates from 4.67% to 4.88% this week "on fears over mounting inflationary pressures."
The impact of the March jobs report will be subdued because the Fed will have the April jobs data in hand before their next meeting.
The March report, to be released by the Labor Department on Friday at 8:30 a.m. Eastern, is the highlight of a relatively quiet week for the economic calendar. Most of the action comes on Monday and Friday, with just a couple of releases in the middle of the week. See Economic Calendar.
The week's releases "will reinforce the picture of good underlying growth in the economy," said Brian Bethune, U.S. economist for Global Insight.
Job growth is expected to be relatively healthy, but not as strong as in February. Economists polled by MarketWatch see nonfarm payrolls rising by about 185,000 in March, down from 243,000 in February.
In the past year, payroll growth has averaged 171,000 per month.
The slowdown in job creation shouldn't be seen as a sign of a weaker economy, said David Greenlaw, an economist for Morgan Stanley. He doesn't think strong hiring in February at construction sites or in government offices was sustainable and looks for a bit of a payback in March. Construction and government contributed 79,000 of the 243,000 new jobs in February.
The unemployment rate is expected to remain at 4.8%, just above the five-year low set in January. The unemployment rate was 5.1% a year ago.
In terms of market reaction, the payrolls number could take a back seat this month to the average hourly earnings figure. After years of sub-par wage growth, wages have suddenly perked up in the past few months.
After rising 0.4% in December and January and 0.3% in February, hourly wages have now increased 3.5% in the past 12 months.
Economists are looking for another 0.3% increase in earnings in March, which would be enough to take the year-over-year gain to 3.6%.
Before we gather a mob, we should be reminded, Hoffman said, that earnings growth continues to lag behind inflation, which has increased 3.6% in the past year.
So far, wages aren't keeping up with inflation. Except in isolated occupations, wages haven't been a factor in pushing inflation higher. If you want a culprit for the acceleration in inflation, look at energy and commodity prices.
Rising wages, of course, are good for workers and for an economy that's based, as ours is, on consumption.
But the Fed wants to keep a balance: Wages that grow too rapidly could threaten an inflation breakout, but wages that grow too slowly could put the expansion at risk.
Economists feel confident that job growth will remain healthy enough to keep consumption up despite an expected slowdown in housing later this year.
"Consumption spending will continue to plod ahead in the second quarter," said Global Insight's Bethune.
Other data
The other big release of the week comes in Monday with the Institute for Supply Management index. The ISM index is expected to rise to 57.4% in March from 56.7% in February. The index will be released Monday at 10 a.m. Eastern.
Any reading over 55% is great, so markets won't likely react too much to a small miss either way. The prices paid index could gain some attention as a gauge of inflationary pressures on businesses.
In February, the prices index dropped to 62.5%, with 36% of firms saying they paid higher prices for inputs, the lowest percentage since August. Morgan Stanley's Greenlaw expects "some modest slippage" in the price index.
Also on Monday, automakers will report their sales for March. Economists expect flat sales of around 16.6 million annualized units.
Construction spending is expected to increase 0.5% in February after a 0.2% gain in January. The data come out Monday.
The ISM's nonmanufacturing index should slip to a still-strong 59.4% in March from 60.1% in February. Once again, prices paid could be the key number to look at; it fell to 64.8% in February. The index will be released Wednesday.
Wage growth could fuel the bears
By Rex Nutting, MarketWatch
Last Update: 3:01 AM ET Apr 1, 2006
WASHINGTON (MarketWatch) -- The Federal Reserve is watching the data carefully these days, but it's not watching every piece of data equally.
The always-important monthly jobs report has gained even more importance as the Fed tries to finesse a soft landing in the economy, one with moderate growth and moderate inflation.
When the Federal Open Market Committee says that "possible increases in resource utilization ... have the potential to add to inflation pressures," it's talking mostly about jobs and wages.
Tight labor markets could lead to higher wages, so the theory goes. And higher wages could allow potential inflation to turn into actual inflation.
"Any sign of further acceleration in earnings growth will be interpreted by some to mean the FOMC will have to take the Fed funds rate above 5%," said Stu Hoffman, chief economist for PNC
"A stronger-than-expected jobs report next week would provide further fuel for the bond bears," Hoffman said. The bears pushed up long-term interest rates from 4.67% to 4.88% this week "on fears over mounting inflationary pressures."
The impact of the March jobs report will be subdued because the Fed will have the April jobs data in hand before their next meeting.
The March report, to be released by the Labor Department on Friday at 8:30 a.m. Eastern, is the highlight of a relatively quiet week for the economic calendar. Most of the action comes on Monday and Friday, with just a couple of releases in the middle of the week. See Economic Calendar.
The week's releases "will reinforce the picture of good underlying growth in the economy," said Brian Bethune, U.S. economist for Global Insight.
Job growth is expected to be relatively healthy, but not as strong as in February. Economists polled by MarketWatch see nonfarm payrolls rising by about 185,000 in March, down from 243,000 in February.
In the past year, payroll growth has averaged 171,000 per month.
The slowdown in job creation shouldn't be seen as a sign of a weaker economy, said David Greenlaw, an economist for Morgan Stanley. He doesn't think strong hiring in February at construction sites or in government offices was sustainable and looks for a bit of a payback in March. Construction and government contributed 79,000 of the 243,000 new jobs in February.
The unemployment rate is expected to remain at 4.8%, just above the five-year low set in January. The unemployment rate was 5.1% a year ago.
In terms of market reaction, the payrolls number could take a back seat this month to the average hourly earnings figure. After years of sub-par wage growth, wages have suddenly perked up in the past few months.
After rising 0.4% in December and January and 0.3% in February, hourly wages have now increased 3.5% in the past 12 months.
Economists are looking for another 0.3% increase in earnings in March, which would be enough to take the year-over-year gain to 3.6%.
Before we gather a mob, we should be reminded, Hoffman said, that earnings growth continues to lag behind inflation, which has increased 3.6% in the past year.
So far, wages aren't keeping up with inflation. Except in isolated occupations, wages haven't been a factor in pushing inflation higher. If you want a culprit for the acceleration in inflation, look at energy and commodity prices.
Rising wages, of course, are good for workers and for an economy that's based, as ours is, on consumption.
But the Fed wants to keep a balance: Wages that grow too rapidly could threaten an inflation breakout, but wages that grow too slowly could put the expansion at risk.
Economists feel confident that job growth will remain healthy enough to keep consumption up despite an expected slowdown in housing later this year.
"Consumption spending will continue to plod ahead in the second quarter," said Global Insight's Bethune.
Other data
The other big release of the week comes in Monday with the Institute for Supply Management index. The ISM index is expected to rise to 57.4% in March from 56.7% in February. The index will be released Monday at 10 a.m. Eastern.
Any reading over 55% is great, so markets won't likely react too much to a small miss either way. The prices paid index could gain some attention as a gauge of inflationary pressures on businesses.
In February, the prices index dropped to 62.5%, with 36% of firms saying they paid higher prices for inputs, the lowest percentage since August. Morgan Stanley's Greenlaw expects "some modest slippage" in the price index.
Also on Monday, automakers will report their sales for March. Economists expect flat sales of around 16.6 million annualized units.
Construction spending is expected to increase 0.5% in February after a 0.2% gain in January. The data come out Monday.
The ISM's nonmanufacturing index should slip to a still-strong 59.4% in March from 60.1% in February. Once again, prices paid could be the key number to look at; it fell to 64.8% in February. The index will be released Wednesday.
posted by Jones Lang LaSalle NJ News Blog at 10:06 AM
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