U.S.: There's Something Screwy About The Strong Labor Stats
The December employment report should have carried the disclaimer attached to mutual-fund brochures: "Past performance is no guarantee of future gains." Payrolls ended 1998 with a bang, posting a larger-than-expected gain of 378,000, and the unemployment rate slipped to a 28-year low of 4.3%. The data sent economists and Wall Street scurrying to rethink the slowdown forecast. The Dow Jones industrial average jumped 106 points on the day of the news to a record 9,643, as investors once again bet that profits would meet their high expectations in 1999.
But beneath the headline-grabbing numbers lie several questions about just how much momentum the economy carries into 1999, especially now that a Brazilian currency devaluation threatens the global outlook. First, the Labor Dept. said unusually warm weather boosted construction employment by 104,000, the biggest gain in 14 years. That suggests the cold snap gripping most of the nation in January is holding down jobs in the building trades and elsewhere this month. And government jobs jumped by an unusually large 59,000 in December.
MORE IMPORTANT, and more troubling for the outlook, the data indicated that wage growth is slowing. As measured by hourly pay for production workers, wages rose 3.8% in the year ended in the fourth quarter, down from a 4.1% advance in the third and this expansion's peak of a 4.3% gain in the second quarter. Moreover, the slowdown is evident in both manufacturing and service pay.
The idea that wage gains are slowing when only 4.3% of the labor force is unemployed seems impossible (chart). Tight labor markets typically mean that businesses should be increasing pay raises to attract or keep workers.
Indeed, some special factors might explain the slowdown: The past hikes in the minimum wage are no longer included in year-to-year comparisons. And companies may be reclassifying jobs from production status to supervisory or management. The ratio of production jobs to total payrolls has begun to edge down--something that hasn't happened since the last recession. If these reasons are skewing wage growth, then Labor's broader compensation measure, the quarterly employment cost index (to be reported on Jan. 28), will likely show wages are still accelerating.
But what if the wage slowdown marks an effort by companies to pump up sagging profits by lowering their labor costs? Such a strategy makes sense in an era of no pricing power and slowing demand, especially from overseas customers. And companies may still be attracting skilled workers by offering generous benefit packages. The rising benefits costs are then offset by holding down pay raises.
More data will be needed to sort out whether the wage slowdown is conditional or fundamental. But either way, economic growth seems destined to slow. If the wage slowdown is temporary, then consumers will benefit and continue to provide support for the economy. But profits, capital spending, and the stock market will still be at risk when wages pick up again.
If, however, the wage slowdown is structural, then companies may be able to lift their profit margins, a plus for stocks and business investment. But consumer spending will lose an important support: very strong income growth. Holding down pay raises is not as severe or newsmaking as layoffs, but its effect can be more widespread. Moreover, since consumer spending accounts for two-thirds of real gross domestic product, any buying slowdown will translate quickly to slower GDP growth. And if demand slows sharply, then corporate profits may still weaken even if margins improve.
FOR NOW, HOUSEHOLDS' real buying power is still rising, thanks to the increase in total employment and low inflation. And clearly, a lot of workers joined the labor force in December. The 378,000 gain to nonfarm payrolls, the largest since September, 1997, was almost twice expectations. And the hiring was widespread, with 59.3% of industries adding workers, up from 54.4% in November.
Manufacturers were still cutting positions (chart), however. That sector shed 13,000 jobs last month, bringing the total number of factory layoffs since January, 1998, to 267,000. But the factory workweek expanded by 12 minutes, to 41.8 hours. That's a good sign for industrial production and future employment, since factories that see an increase in orders typically extend the hours of their current workers before taking on new employees.
Private service companies created 231,000 jobs in December. Department stores hired clerks for the holiday rush, and temporary-help agencies added 27,000 workers, the biggest gain since August. In addition, the high pace of home buying and mortgage refinancings caused mortgage banks to add another 4,000 workers last month.
The growth in all nonfarm jobs in the fourth quarter averaged 264,000 per month. That's better than the 204,000 average of the third quarter, and it suggests that the economy once again expanded in excess of 3% in the fourth.
GIVEN THE STRONG JOB MARKET, consumers remained ardent shoppers at yearend. In particular, auto makers said that sales of cars and light trucks soared 12.4% in December, to an annual rate of 17.2 million (chart). That's the strongest month since 1986, but the Commerce Dept. cautioned it would likely adjust the number lower when it calculates the vehicle data that go into consumer spending in the GDP report. That's because dealers padded their December results with sales that actually occurred in the first few days of January.
And after pulling out of those showrooms in early 1999, consumers drove their new vehicles to the nearest mall and shopped for post-holiday bargains. Weekly surveys indicate that store sales in early January were running about 2% above December's level.
For now, consumer confidence doesn't seem dented by a lot of the negative influences. The January sales rise came despite bad weather in parts of the nation, the impeachment trial in Washington, and U.S. bombing in Iraq. Such resilience prompts the question: What will curb consumers? The key determinants will be the same as they were in 1998--income growth and the stock market.
That's why the outlook for corporate profits remains crucial to the 1999 economy. Businesses are facing an earnings squeeze. And since companies possess little pricing power, making more money out of each sale will mean cutting the cost of producing that product. And the biggest cost for the average company remains its workers.