Monday, July 7, 2014

Strong Job Gains with Subdued Wage Inflation (excerpt)

Also adding to last week’s lovefest was June’s employment report. It was a strong one, which should have raised concerns that the Fed might have to start raising interest rates sooner rather than later. Indeed, the 10-year US Treasury bond yield has risen from the year’s low of 2.44% on May 28 to 2.65% on Thursday. That’s a relatively tame reaction given that the unemployment rate is down to 6.1%, the lowest since September 2008.

However, wage inflation remains subdued at 2.0% despite the drop in the jobless rate. Since she became Fed chair earlier this year, Yellen has stated that she wants to see wage inflation rise to between 3%-4% before she’ll be happy with the performance of the labor market. Of course, this is just one of the labor market indicators on Yellen’s “dashboard.” Some of the others show that the labor market is improving, but she is clearly giving more weight to wages. Let’s review:

(1) The U-6 unemployment rate fell from 12.2% during May to 12.1% during June, the lowest since October 2008.

(2) The long-term unemployment rate fell to 2.0% last month, the lowest since February 2009.

(3) The long-term unemployment as a percentage of total unemployment fell to 32.8% during June, the lowest since June 2009.

There were plenty of other upbeat employment indicators, as Debbie reports below. Most importantly, our Earned Income Proxy (i.e., aggregate hours worked times average hourly earnings) rose 0.5% last month to another record high. It is highly correlated with both private wages and salaries in personal income and with retail sales.

Today's Morning Briefing: Monetary Lovefest. (1) Should monetary policy aim for financial stability? (2) Yellen prefers “macroprudential policies” to address the issue. (3) Yellen sides with Lagarde. (4) Raising margin requirements is on the table. (5) Bull charged up again by more NZIRP talk. (6) The melt-up scenario is back in play. (7) Frothy P/Es. (8) Internal correction is over. (9) Yellen’s Dashboard: Putting more weight on wage inflation. (More for subscribers.)

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