Wednesday, February 4, 2015

The ONE NUMBER to watch in Friday's NFP report

The consensus headline figure for Friday's NFP release is 234K, but I will be paying far less attention to that number than the Average Hourly Earnings figure which will be released at the same time. That's because the Fed has been watching wage growth for signs of rising inflation.

Core PCE, which is the Fed's favorite inflation metric, was released on Monday and it unexpected dived:

If rates are on track for a June liftoff, which seems to be Yellen`s base case scenario, we need to see some justification in the form of wage pressures. The 4Q 2014 Employment Cost Index, which is arguably a better measure of wage inflation because it is a fixed-weight measure and adjusts for shifts in employment categories, came in at 0.6% (vs. 0.7% for 3Q). While that does represent a deceleration in the ECI, the YoY change was 2.3%, which is well above the Fed's 2% inflation target.

By contrast, Average Hourly Earnings is not a fixed-weight measure of wages and therefore it does not represent an apples-to-apples comparison of wage pressures. As an example, higher growth in low-wages jobs will depress Average Hourly Earnings compared to the ECI. Nevertheless, it is an monthly series and provides more frequent readings than the quarterly ECI.

The December YoY change in Average Hourly Earnings was unusually low. I will therefore be watching the January release carefully to see if December was a statistical blip (and to see if December gets revised upward.)

On one hand, inflation measures falling. On the other hand, the news of pending strikes in the oil industry is a sign of the strengthening bargaining position of labor and a sign of resurgent wage pressure. Other signs of wage pressures are showing up in the restaurants and hotel sector:

As per Goldman Sachs, wage pressures indicators are all pointing up, but the Fed needs more confirmation from the data. That's why Friday`s release of Average Hourly Earnings in the NFP report will be the most important number to watch.

This may turn out to be inflation's last stand, or the beginnings of resurgent wage inflationary spiral that solidifies a June target for a Fed rate hike.


MGell said...

Pending strikes in the oil refining industry does not seem like a sign of rising wage pressure. This is one industry which is not representative of wages and jobs as a whole. It is one of the most capital intensive industries in our economy. Plus with falling crude prices, it is unlikely that higher wages in the oil refining would have an impact on prices in the economy. Anyway, the wage issue seems to be about health care and not a bid for higher wages.

Cam Hui, CFA said...

Don't you find it fascinating that the union is striking in a sector that's encountering trouble? While the strikes are occurring in refining, which is somewhat insulated from the oil price collapse, isn't indicative of a stronger bargaining power of labor under those circumstances?