Jones Lang LaSalle
Signs point to slower hiring
Economists expect payrolls grew by 175,000 jobs in May
By Rex Nutting, MarketWatch
Last Update: 6:31 PM ET Jun 1, 2006
WASHINGTON (MarketWatch) -- The signs are only tentative, but some early indicators point to a slower pace of hiring.
After getting a sluggish start coming out of the 2001 recession, payroll growth has been fairly steady for the past three years. It's been almost too strong, with the unemployment rate falling to 4.7%, low enough to start feeding inflation, some economists say.
The Labor Department will release its May employment report on Friday at 8:30 a.m. Eastern time. Economists surveyed by MarketWatch look for payrolls to grow by about 175,000 in May, following a disappointing 138,000 gain in April. The unemployment rate is expected to stay at 4.7%.
Payroll growth has averaged about 165,000 over the past 12 months and about 200,000 per month since November, when payrolls began to bounce back from the hurricanes. Warm weather in the first months of the year also boosted payrolls, as some seasonal workers got some extra weeks of work.
Slowdown
Now it looks like hiring could throttle back just a bit from that pace.
The jobs report should reinforce a sense of moderation in the labor market, said Ed McKelvey, an economist for Goldman Sachs.
"The recent uptrend in claims suggests that employment growth has started to slow," said Maury Harris, chief U.S. economist for UBS.
Harris says it's possible payroll growth could be a bit weaker than expected in May. Jobless claims have been trending higher, which can be a sign of weaker hiring. The help-wanted index dropped to a four-decade low. The new ADP employment report forecast a gain of about 133,000 jobs in May. And, finally, the Institute for Supply Management's employment index slipped in May.
The employment report has taken on new importance as the Federal Reserve and the markets try to figure out the path of growth and inflation for the rest of the year. A lot is riding on Friday's report.
"We should not overreact to the payroll report, at least in terms of what it means for the Fed," said Joseph LaVorgna, an economist for Deutsche Bank. "There is a lot of data between now and the end of June."
And unfortunately, one jobs report really can't tell us much about the future of growth or inflation.
Looking in rear-view mirror
Slower growth, and slower hiring, would be welcomed at the Fed, because it would reduce inflationary pressures. But employment is not a leading indicator. Nonfarm payrolls tell us more about how the economy was faring a few months ago than they do about how it will fare a few months from now.
Lower inflation would also be welcomed at the Fed. But once again, the employment report won't have much new to say. The markets, of course, will react anyway.
So far, inflationary pressures from higher wages are still in the theoretical phase. There's no evidence that a tight labor market is leading to higher wages, which in turn are fueling inflationary expectations.
Economists expect average hourly earnings to rise 0.2% or 0.3% in May, after a 0.5% gain in April that shocked the bond market. The year-over-year increase in average hourly earnings was 3.8% in April, the highest in five years. It's likely the year-over-year rate will continue to accelerate in May; anything more than 0.2% would do the trick.
If wages rise 0.4% or more, look for the market to solidify its expectations for a June rate hike.
Despite some big increases in hourly earnings in the past few months, wage growth in the past year is barely higher than the inflation rate. Real average hourly earnings (that is, adjusted for inflation) are lower now than they were at the end of the recession in 2001. In fact, they are lower now than they were at the end of the recession in 1970.
The productivity numbers that were revised Thursday show that unit labor costs are up just 0.3% in the past year. The employment cost index tells a similar story.
If the Fed is going to sell us a story about wage-based inflation, "it has to be sold as a matter of forecast," not reality, said Jay Feldman, an economist for Credit Suisse. "The current data say loud and clear that labor costs - which account for about 70% of business costs - are not an inflation problem today."
"Despite growing indications of an increasingly tight labor market, wage inflation is not the primary source of inflationary pressures in the U.S. economy," said Stu Hoffman, chief economist for PNC.
Other economists don't see it that way, however.
"Inflation is lurking, and the Fed knows it," said Gina Martin, an economist for Wachovia. "Average hourly earnings are on the rise, which should pressure compensation higher. Unless economic growth slows enough to slow the labor market and thus earnings, unit labor costs are likely to rise in the quarters ahead." And that would lead to higher interest rates from the Fed.
The Fed has a public relations problem: The two best-known and most closely followed statistics - nonfarm payrolls and the consumer price index - are backward-looking indicators. The CPI, in particular, changes long after peaks or troughs in the economy.
But markets look to payrolls and inflation to forecast what the Fed will do next.
Game of chicken
"It is important to emphasize that a moderation in real economic growth, which seems to be unfolding, would have little impact on the inflation measures through year-end 2006," said Mickey Levy, chief economist for Bank of America. Levy now expects the Fed to raise rates three more times this year, even though it will have no impact on inflation this year.
So why would the Fed keep raising rates even as growth slows? "Financial markets are challenging the Fed's inflation-fighting credibility," Levy says. In other words, the markets are daring Fed Chairman Ben Bernanke to raise rates, even if that goes against his better judgment, just to appear tough.
The Fed would like to focus its attention on the near-term future, the next six to nine months, not on the near-term past. But that's hard to do when the markets react so strongly to the backward-looking data.
The Fed has a choice to either let the market bully it into abandoning its forward-looking policy, or to better communicate to the public how the economy works, particularly the lags in growth, interest rates and inflation.
Rex Nutting is Washington bureau chief of MarketWatch.
Signs point to slower hiring
Economists expect payrolls grew by 175,000 jobs in May
By Rex Nutting, MarketWatch
Last Update: 6:31 PM ET Jun 1, 2006
WASHINGTON (MarketWatch) -- The signs are only tentative, but some early indicators point to a slower pace of hiring.
After getting a sluggish start coming out of the 2001 recession, payroll growth has been fairly steady for the past three years. It's been almost too strong, with the unemployment rate falling to 4.7%, low enough to start feeding inflation, some economists say.
The Labor Department will release its May employment report on Friday at 8:30 a.m. Eastern time. Economists surveyed by MarketWatch look for payrolls to grow by about 175,000 in May, following a disappointing 138,000 gain in April. The unemployment rate is expected to stay at 4.7%.
Payroll growth has averaged about 165,000 over the past 12 months and about 200,000 per month since November, when payrolls began to bounce back from the hurricanes. Warm weather in the first months of the year also boosted payrolls, as some seasonal workers got some extra weeks of work.
Slowdown
Now it looks like hiring could throttle back just a bit from that pace.
The jobs report should reinforce a sense of moderation in the labor market, said Ed McKelvey, an economist for Goldman Sachs.
"The recent uptrend in claims suggests that employment growth has started to slow," said Maury Harris, chief U.S. economist for UBS.
Harris says it's possible payroll growth could be a bit weaker than expected in May. Jobless claims have been trending higher, which can be a sign of weaker hiring. The help-wanted index dropped to a four-decade low. The new ADP employment report forecast a gain of about 133,000 jobs in May. And, finally, the Institute for Supply Management's employment index slipped in May.
The employment report has taken on new importance as the Federal Reserve and the markets try to figure out the path of growth and inflation for the rest of the year. A lot is riding on Friday's report.
"We should not overreact to the payroll report, at least in terms of what it means for the Fed," said Joseph LaVorgna, an economist for Deutsche Bank. "There is a lot of data between now and the end of June."
And unfortunately, one jobs report really can't tell us much about the future of growth or inflation.
Looking in rear-view mirror
Slower growth, and slower hiring, would be welcomed at the Fed, because it would reduce inflationary pressures. But employment is not a leading indicator. Nonfarm payrolls tell us more about how the economy was faring a few months ago than they do about how it will fare a few months from now.
Lower inflation would also be welcomed at the Fed. But once again, the employment report won't have much new to say. The markets, of course, will react anyway.
So far, inflationary pressures from higher wages are still in the theoretical phase. There's no evidence that a tight labor market is leading to higher wages, which in turn are fueling inflationary expectations.
Economists expect average hourly earnings to rise 0.2% or 0.3% in May, after a 0.5% gain in April that shocked the bond market. The year-over-year increase in average hourly earnings was 3.8% in April, the highest in five years. It's likely the year-over-year rate will continue to accelerate in May; anything more than 0.2% would do the trick.
If wages rise 0.4% or more, look for the market to solidify its expectations for a June rate hike.
Despite some big increases in hourly earnings in the past few months, wage growth in the past year is barely higher than the inflation rate. Real average hourly earnings (that is, adjusted for inflation) are lower now than they were at the end of the recession in 2001. In fact, they are lower now than they were at the end of the recession in 1970.
The productivity numbers that were revised Thursday show that unit labor costs are up just 0.3% in the past year. The employment cost index tells a similar story.
If the Fed is going to sell us a story about wage-based inflation, "it has to be sold as a matter of forecast," not reality, said Jay Feldman, an economist for Credit Suisse. "The current data say loud and clear that labor costs - which account for about 70% of business costs - are not an inflation problem today."
"Despite growing indications of an increasingly tight labor market, wage inflation is not the primary source of inflationary pressures in the U.S. economy," said Stu Hoffman, chief economist for PNC.
Other economists don't see it that way, however.
"Inflation is lurking, and the Fed knows it," said Gina Martin, an economist for Wachovia. "Average hourly earnings are on the rise, which should pressure compensation higher. Unless economic growth slows enough to slow the labor market and thus earnings, unit labor costs are likely to rise in the quarters ahead." And that would lead to higher interest rates from the Fed.
The Fed has a public relations problem: The two best-known and most closely followed statistics - nonfarm payrolls and the consumer price index - are backward-looking indicators. The CPI, in particular, changes long after peaks or troughs in the economy.
But markets look to payrolls and inflation to forecast what the Fed will do next.
Game of chicken
"It is important to emphasize that a moderation in real economic growth, which seems to be unfolding, would have little impact on the inflation measures through year-end 2006," said Mickey Levy, chief economist for Bank of America. Levy now expects the Fed to raise rates three more times this year, even though it will have no impact on inflation this year.
So why would the Fed keep raising rates even as growth slows? "Financial markets are challenging the Fed's inflation-fighting credibility," Levy says. In other words, the markets are daring Fed Chairman Ben Bernanke to raise rates, even if that goes against his better judgment, just to appear tough.
The Fed would like to focus its attention on the near-term future, the next six to nine months, not on the near-term past. But that's hard to do when the markets react so strongly to the backward-looking data.
The Fed has a choice to either let the market bully it into abandoning its forward-looking policy, or to better communicate to the public how the economy works, particularly the lags in growth, interest rates and inflation.
Rex Nutting is Washington bureau chief of MarketWatch.
posted by Jones Lang LaSalle NJ News Blog at 4:21 PM
<< Home