David Rosenberg at Gluskin Sheff flagged a different way of looking at US unemployment figures on Monday; rather than noting the slowing rise in unemployment, he pointed in the direction of the number of people employed part-time and average hours worked.
In which case the two following trends can be observed:
The part-timezation effect of slowing wage growth and declining hours has had one major impact on corporate America, says Rosenberg: a decreasing wage bill. Unfortunately, this comes at the expense of personal income and aggregate demand, which are needed to grow top-line revenues.
What it equals — in no uncertain terms according to Rosenberg — is a clear and ongoing ‘deflation alert’. A fact currently being ignored by the bond markets.
As Rosenberg explains (our emphasis):
It is one thing when a few companies do it, but right now two out of every three companies are shedding labour. Average weekly earnings — the wage-based proxy for personal income — has slowed to a mere 1.2% YoY, and as Chart 6 illustrates, is testing critical support levels. They actually fell 0.2% MoM in May and over the last three months, have deflated in rare fashion at a 0.7% annual rate.
This is the critical deflation that the bond bears do not see — not yet anyway — but the Fed surely knows this and the view being expressed in the futures market that we will see three rate hikes in the next year seems to be out of touch with this wage contraction reality.
As for the market rejoicing over last week’s slowing decline in nonfarm payrolls, Rosenberg reminds last month’s number at -345m was still bigger than any delivered during the recessions of 2001 and 1991. The focus therefore should be on the growing pool of unemployed. This number, as it happens, does not appear to be contracting. As Rosenberg explains:
Be that as it may, what is important is the growing pool of unemployed, which soared 787,000 in May — the fifth highest on record. There are 14.5 million in the ranks of the unemployed, and this swelled by a record six million over the last 12 months.
So, it really is only one part of the story that companies are no longer cutting as many jobs as they were at the peak of the firing wave at the start of the year — nobody is hiring the new entrants who are coming into the labour force (the labour force expanded 350,000 last month). There is currently a record 12.8 million unemployed Americans who are now looking for full-time positions that do not exist — almost doubling in the last year. Now what do you suppose that is going to do to the prevailing wage rates?
The fact that increasing amounts of people are chasing full-time jobs that simply ‘don’t exist’ leads to one very important and deflationary effect: pay cuts and the ‘de-stickification of wages’.
Wages are usually one of the last pennies to drop in any economic adjustment. They also happen to be among the most important in determining how significant the spell of deflationary or inflationary force is going to be. After all, falling prices are fine if wages remain the same. If wages begin to fall too that becomes a very different scenario. Vice versa is of course true for a rampant inflationary environment.
Accordingly, we may have only reached the big testing point for the Fed and government’s actions now. One fact that doesn’t appear to bode well, however, is that it is taking far longer for the pool of unemployed to find a new job than in any other cycle in the past five decades:
Which leads Rosenberg to conclude:
So think about that; 1 in 6 Americans are either unemployed or underemployed. Again, is it reasonable to assume, as the bond vigilantes have, that we will experience a sustained inflationary surge out of this excess labour supply environment?
Tsk, tsk, tsk to the bond vigilantes then.
Related links:
Recessionary datapoint du jour, food stamps edition - FT Alphaville
The dollar, US jobs and a risk that could derail markets - FT Alphaville
