Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Key Economic Indicator You Should Watch in 2018

Economics / US Economy Jan 15, 2018 - 03:01 PM GMT

By: John_Mauldin

Economics

BY PATRICK WATSON : I think this year’s top risk is a miscalculation by the Federal Reserve—specifically, that it will tighten monetary policy too much.

The Fed is hiking interest rates because its experts believe the economy is close to “full employment.” And the Phillips Curve says wages should start rising any minute now.


But economists have been scratching their heads trying to understand why wages aren’t already shooting higher. If qualified workers are so hard to find, why don’t employers offer higher pay to attract more?

Labor Supply Is Bigger Than Data Suggests

One possibility: the untapped labor supply is more than the 4.1% jobless rate suggests.

Here’s an interesting stat you may not have seen.

Most newly employed people weren’t on the books as “unemployed” right before starting their jobs. They went straight from “out of the labor force” to “employed,” because they were in school or military service—or otherwise neither employed nor seeking a job.


Chart: Bloomberg

That means if you’re an employer, the available-worker pool from which you can draw is much bigger than the 4.1% of the labor force that is nominally “unemployed.”

This suggests wage pressure might be farther off than we think.

Another measuring challenge is that we look at average hourly earnings. Total pay can go up even when hourly wages don’t, if workers get more on-the-clock hours… which they have, slightly.

Average weekly earnings rose 2.8% in 2017 while average hourly earnings rose only 2.5%. Even a 2.8% wage gain wasn’t much, though, once you subtract last year’s 2.2% Consumer Price Index (CPI) inflation.

Regional Wage Differences

Like the employment rate, wages also have a lot of regional variation.

They’re rising faster in cities that have below-average unemployment. You can see it in this chart, which shows that since 2008, wages rose much more in the Minneapolis and Ogden, Utah metro areas.


Chart: Wall Street Journal

Better yet, wages are catching up in Fort Myers, Florida, where they had lagged badly for years. We need the trends to spread elsewhere, but these are encouraging signs.

Another small but positive sign was the move by some large corporations to give employee bonuses after President Trump signed the tax cuts. Was it partly a publicity stunt?

Yes, but the money was real. Now we need to see those same companies and others raise regular wages and increase their headcount.

Minimum Wage Rising

A third change is that 18 states raised their minimum wages as of this month.

The Economic Policy Institute estimates the increases will mean $5 billion in additional wages to about 4.5 million workers.

 Here’s their full list.


Source: Economic Policy Institute

Is that enough to affect the national inflation rates the Fed is watching? Maybe not. Further, paying those higher wages may force employers to cut other expenses, leaving the overall inflation rate unaffected.

However, there may also be a spillover effect. Higher entry-level wages can force employers to raise pay further up the ladder too, in order to keep “relative” earnings the same.

The numbers above don’t include this.

Watch Wages Through the Fed’s Eyes

For forecasting purposes, whatever you or I think about the wage situation is less important than what Federal Reserve officials think. The December FOMC minutes are our most recent look inside their heads.

A few participants judged that the tightness in labor markets was likely to translate into an acceleration in wages; however, another observed that the absence of broad-based upward wage pressures suggested that there might be scope for further improvement in labor market conditions.

Reading the tea leaves here, “a few” who thought wages will rise should outweigh the “another” who saw an absence of wage pressures. But is that a majority? We don’t know. Plus, the Fed will be getting new faces this year with possibly different ideas.

As of last month, the dot plots showed three rate hikes coming this year. Futures markets imply it will be less than that, maybe only two.

If that’s the plan when wage growth is at best uncertain, then it won't take much for the Fed to hike rates higher and faster than expected.

That, in turn, could quickly change the Goldilocks scenarios that project everything will go just right this year, letting stock prices move up steadily.

On the other hand, higher wages will put more money in workers’ pockets and give them more spending power. That will be good for the economy, even if it’s negative for stocks.

Pay Attention

All this suggests paying attention to wage data will be important this year. It’s really the key to everything.

  • Stronger-than-expected wage growth will make the Fed see inflation, tighten policy more than presently expected, and probably send stock prices lower.
  • Conversely, continued flat wages will let the Fed stay on its present slow-hiking course. That would be bullish for stocks.

I’d like to see the first scenario, because I think it will be the best long-term outcome for everyone. However, I think the second scenario is closer to what we’ll get.

Other factors are also in the mix. Energy prices have spiked, for instance. That could boost inflation prospects if it persists.

Like the Fed, I’m data-dependent. I’ve told my subscribers I’ll watch the numbers and adjust accordingly. You should do the same.

Free Report: The New Asset Class Helping Investors Earn 7% Yields in a 2.5% World

While the Fed may be raising interest rates, the reality is we still live in a low-yield world. This report will show you how to start earning market-beating yields in as little as 30 days... and simultaneously reduce your portfolio’s risk exposure.

Claim your free copy here.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in