Wage Growth Is Not Excessively Inflationary

Wage Growth - Jobless Claims & Job Cuts

Jobless claims and Challenger Job Cuts report didn’t match because one time layoffs boosted job cuts. The jobless claims report signals all is fine in the labor market. Number of claims fell from 216,000 to 214,000.

There wasn’t much of an effect on the labor market from hurricane Michael. Claims in Florida and Georgia fell about 4,500 combined. That reversed the 7,000 increase in the previous week.

Previous jobless claims report of 216,000 claims signals the October labor market report this Friday should be strong.

Continuing claims fell to 1.631 million and the 4 week moving average fell to 1.641 million. Both hit new 45 year lows.

The unemployment rate for insured workers is only 1.1%. Jobless claims report historically is very highly correlated with the stock market. It means the correction in stocks will end shortly. I am skeptical of the claims now. The labor market isn’t the strongest ever based on the prime age labor participation rate. This is even though the jobless claims to labor force ratio is at a record low.

However, in this case I strongly agree with the indicator. I think the correction in stocks wasn’t a sign a bear market is coming.

Wage Growth - The October Challenger Job Cut report disagrees with every other labor report reading. 

As you can see from the chart below, it spiked 153.6% from last year. It increased from 55,285 to 75,644.

This spike was caused by Verizon’s layoff announcement. It offered voluntary severance packages to 44,000 managers to save $10 billion. The September report was skewed by the announcement from Wells Fargo to cut 26,000 jobs. That's 10% of its workforce.

There was a similar spike in March caused by Toys R Us which announced 33,000 job cuts. I won’t change my opinion on the labor market. Certainly not because Verizon is trying to cut costs or because Wells Fargo is doing poorly.

Wage Growth - Review Of The Productivity & Unit Labor Report

Q3 productivity growth on a quarter over quarter basis was 2.2%. That missed the consensus for 2.3% growth. Q2 growth was revised from 2.9% to 3%.

As you can see from the chart below, this cycle has been mired with years of weak productivity growth. Some people question anecdotally if social media addiction is hurting productivity. Others wonder if this calculation is outdated because the internet appears to have made workers more effective and efficient.

The ideal scenario is to have quick productivity growth and low inflation.

As you can see below, unit labor costs have been decelerating on a year over year basis. That’s surprising given the increased wage growth. The quarter over quarter number accelerated comparison was very weak. Quarter over quarter growth was -1% in Q2. It increased to 1.2% in Q3. That beat estimates for 1.1% growth.

Compensation growth was 3.5% in Q3 after growing 1.9% in Q2. Output growth fell 0.9% to 4.1% which is still strong. Hours worked growth fell 0.2% to 1.8%. Real compensation was up 1.4% after being up fractionally and declining in the past 3 quarters.

As I have mentioned previously, I expect real wage growth to accelerate in the next few months. I also expect inflation fall because of tougher comparisons. Also, nominal wages will likely rise due to tightness in the labor market.

Wage Growth - Strong Markit PMI Report

We’ve seen some weakness in capex in the regional Fed manufacturing reports. That's concerning some investors.

Even the ISM manufacturing PMI fell, as I will get to later in this article. However, the October Markit PMI was decent. It came in at 55.7 which was higher than the prior month’s report of 55.6.

It was slightly below the consensus and the mid-month report which were both 55.9.

New orders came in at a 5 month high even though export sales barely grew. Production growth was strong and the employment reading hit a 10 month high. High raw materials costs and the primary metals tariffs caused cost pressures to be described as “intense.”

Wage Growth - Solid Construction Spending

The August construction report was revised higher which made September growth look worse than it was.

Month over growth went from 0.1% in August to 0.8%. Growth was flat in September which missed estimates for 0.2%. Year over year growth was 7.4% in August and 7.2% in September.

Residential investment underperformed as it as up 5.1%. Spending on multi-unit housing was up 8.7% month over month and 8.2% year over year. Single family construction spending was up 3.1% year over year. It was down 0.8% month over month.

Public spending was up 1.1% monthly and 9.9% yearly. Private non-residential spending was weak as it was up 0.1% monthly.

However, it faced tough comparisons as it was up 1.4% last month. Transportation construction was up 18.9% year over year. Office construction was up 13.4%. Commercial and manufacturing construction were up 4.4% and 4.9%.

Wage Growth - Another Strong ISM Report

Some investors are fearful of the ISM PMI in rate of change terms. But I think the decline from last month was virtually meaningless. Overall, it was still a good report.

The October PMI fell from 59.8 to 57.7 which is still strong. This PMI was the weakest since April 2018. It was below the low end of the consensus range which was 58.

As you can see from the chart below, the PMI followed the regional Fed average this month. New orders fell 4.4 points to 57.4. Prices were up 4.7 points to 71.6. This signals the tariffs are causing inflation. Export orders were down 3.8 points.

Overall, this report showed weakness from last month, but it was still great.

This PMI is consistent with 4.5% GDP growth which is likely not going to be reached. Although it’s very early to tell where Q4 GDP will come in at.

The comments claim there is some weakness and complain about tariffs increasing costs.

A miscellaneous manufacturing company stated, “Mounting pressure due to pending tariffs. Bracing for delays in material from China — a rush of orders trying to race tariff implementation is flooding shipping and customs.”

 

 

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