Michael Englund The headline payroll gain in November was impressive, though the lack of large prior upward revisions and less encouraging component data imply that the labor market is revealing the more modest post-hurricane bounce we expected. But there is plenty of rebound in the pipeline. Emerging wage pressure may be of greatest interest to the Fed, given production bottlenecks in many sectors.
Job growth has racked up a respectable 172,000-per-month average over the past 24 months, a steady acceleration from the cyclical trough. The monthly swings seem to have largely stabilized around this level since the start of 2004, and we see little evidence of variation in this pattern going forward.
A post-hurricane overshoot in payroll growth is likely over the coming six months, but it's unlikely to alter meaningfully an otherwise comfortable longer-term growth trend.
This steady pattern of payroll growth around what translates to a 1.6% growth rate has been associated with 4% growth in real gross domestic product (GDP) -- another trajectory that's showing little sign of changing anytime soon.
CONSISTENT EXPANSION. Similarly, there has been little trend change in the average workweek through this expansion, despite the small downtick in the November workweek, to 33.7 hours from 33.8 in the prior two months. These figures have oscillated in the 33.7-to-33.8 area since the cyclical drop in the workweek in the 2001 recession, with only a small net-growth trend evident in these figures through this expansion.
The combination implies that nearly all the growth in hours worked in this expansion is coming from payroll growth, leaving a pattern of growth of about 2% in this measure since the start of 2002, alongside the 4% GDP growth trend.
Although some view the labor market growth path in this expansion as subpar, despite its unusually consistent trajectory, we would note that the downtrend in the unemployment rate to the current lean reading of 5% is right in line with the pace of decline for this important measure in the 1990s expansion.
This downtrend has also been consistent with a cyclical uptrend in hourly earnings growth that's also similar to the last expansion. Indeed, today's report of a 0.2% November increase -- on top of the jumbo 0.6% surge in October -- leaves what now looks like a steep upward trajectory to wage growth in recent months, relative to the last business cycle.
BOTTLENECK INDUSTRIES. This solid and steady trajectory in labor market growth, with accelerating wage growth, is occurring alongside what is likely to be a steady rebound in the capacity utilization rate during the post-hurricane recovery period, as well as above-trend growth in industrial production.
Although today's data translate to "only" a 0.5% industrial production gain in November, following the 0.9% surge in October, we are on track for sizable 0.5%-to-0.7% industrial production increases on a monthly basis for the foreseeable future, as the economy undergoes its post-hurricane rebound.
This near-term production bounce will be fueled by an inevitable jump in the mining component of the industrial production report, along with other related measures, as the nation's refining, mining, and energy distribution sectors come back on line over the next nine months after dramatically depressed readings in the August-to-October period. The bounce in the mining component, in particular, will be impressive.
Rapid production growth in all of the "bottleneck" industries, which include not only all the energy-related sectors, but also a variety of others -- such as the aircraft and heavy-truck sectors, as well as the construction industry -- should fuel solid employment and wage prospects over the coming year. At least in part, this is probably what's behind the strength in wage growth over the past two months.
BONUS DATA. These optimistic growth prospects in key bottleneck industries are also probably behind the accelerated free fall in the personal savings rate over the last six months. Although consumers are quick to take a negative bent when discussing current events with surveyers, they are expressing extraordinary optimism at the cash register.
This willingness to spend is likely related to the large portion of the employment base that faces encouraging labor market conditions over the coming year, as the bottleneck industries post breakneck growth while paying a premium for critical skills.
Today's payroll report suggested a relatively modest 0.2% personal income gain in November, which may restrain some of the spending figures through the holiday season. But reports of jumbo bonus payments this year, similar to the huge payouts of last year, may more than offset the impact of a lean November for income.
Remember that last year's bonus payments were only incorporated into the fourth-quarter income data late in the first quarter of 2005, as real-time data on such payments are sparse. Surprising spending strength in the fourth quarter of 2004 was later explained with income revisions revealed in the following quarter. That pattern may well be repeated.
FED CONCERN. In total, today's labor market data are consistent with "steady as she goes" growth in payrolls and the workweek. The only notable surprise came from what may be an acceleration in wage gains.
U.S. GDP is showing little potential to slow from its unwavering 4% real growth trend of the past two years. Overshoots of this pace are likely in the first half of 2006, just as seen in the third quarter of 2005. We expect only a modest undershoot in the fourth quarter of this year -- to 3.6% growth -- as the string of hurricanes took a chunk out of what otherwise would have been an above-trend quarter.
Although the payroll data today were modest, the U.S. growth juggernaut may be of increasing concern at the Fed, if constraints from the bottleneck industries continue to produce what now looks like upward wage price pressure.
Englund is chief economist for Action Economics