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Monday May 8, 2006 - 14:02:28 GMT
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The US economy

Easter was late this year. So the seasonal factors caused retail trade employment to drop by 36,000 during April. (Employment was up 10,700 not seasonally adjusted during the month in this industry.) Because Easter was later, retail chain store sales were down 1.1% y/y during the last week of March, but jumped to 6.5% by the week of April 29. The point is that the US labor market is much stronger than suggested by April's lower-than-expected gain of 138,000. Indeed, the nonfarm workweek ticked up to 33.9 hours from 33.8 hours in March. That may not seem like much, but it is equivalent to 400,000 new jobs. It is also the first uptick since September 2005. It may be getting harder to find workers, so employers are stretching the workweek to keep up with booming business. April's 0.5% jump in wage inflation was the highest in six months and the 3.8% y/y rate was the highest since August 2001. Wage inflation would be higher, but for the weakness in the auto and construction industries, where wages are up less than 2% y/y. In recent months, we've warned that higher wage inflation usually leads to higher tenant and owner-occupied rent inflation, which together account for a whopping 38% of the core CPI and 17% of the core PCED. The WSJ's Greg IP, who is very well connected at the Fed, observed in Saturday's paper, that March's "creep upward in inflation" was led by the rent components. This is likely to become a bigger issue in coming months. This is one segment of the economy where the Phillips Curve is probably still alive and well. Falling unemployment leads to higher wage increases and, then, higher rent inflation. So I disagree with the widespread view that Friday's employment report was on the weak side and reduces the likelihood of Fed tightening beyond another 25-bps hike on May 10. This also means that the recent free fall in the dollar may be overdone. Perversely, the dollar's decline in response to perceptions that the US economy is slowing is pushing commodity prices higher and boosting US import prices, which could also create more of an inflation problem for the Fed in coming months. Frankly, I am surprised by the tough talk coming out of the ECB last week, which suggested that there could be a rate hike of 50 bps at the June meeting. It certainly contributed to the euro's strength, which is likely to harm the competitive position of European exporters. Yet, the ECB's Jean-Claude Trichet chose not to comment on the euro's sharp rise. Instead, he said that the ECB would be "very, very vigilant" to keep inflation down.

Of course, the weak dollar is great news for US exporters, especially manufacturers of capital goods. No wonder that durable goods manufacturing (DGM) employment is up during the first four months of this year by 46,000. However, most of their output gains are attributable to DGM productivity, which was up 3.8%, annualized, during Q1. Also impressive is that last week's report from the US Bureau of Economic Analysis showed that nonfinancial corporate productivity rose 4.6% vs. a drop of 0.3% for nonfarm productivity during Q4. This helps to offset faster rising wages, especially for professionals and skilled workers who can help improve efficiency.
* Employment & Wages: Employment indicators continue to suggest a pickup in jobs growth. Both initial and continuous claims are at levels consistent with stronger payroll gains. In April's Conference Board survey, the percent of consumers saying jobs were plentiful rose to more than a 4-year high, while those saying jobs were hard to get fell to more than a 4-year low. Hourly pay is on the rise, with the nominal wage rate at more than a 4½-year high of 3.8% y/y.
* Productivity: Nonfarm productivity rebounded 3.2% last quarter, following a small decline during Q4. While a jump in hourly comp caused an acceleration in unit labor costs during the quarter, the y/y gain remained tame at only 1.4%. Meanwhile, just released data for Q4 show nonfinancial productivity continues to grow considerably above trend. Strong productivity growth should remain the driving force behind solid profit growth, strong consumer incomes and spending, and low inflation.
* Weekly Consumer Monitor: Late Easter boosted chain store sales in late April. Seasonal factors may have increased jobless claims, but they're still low. The 4-week average in continuing claims remained near the prior week's level, which was lowest in more than 5 years. Mortgage applications jumped 11% last week, reversing the 11% slide the prior 3 weeks. Personal loan growth stable, while home equity borrowing continued to fall toward zero.

 

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