The big news this morning is the US employment report. The headline numbers were all good, though the add to non-farm payrolls came in below expectations. While this was a good report, the wage-related data were disappointing. Some thoughts follow below as well as a brief piece on Japan’s predicament.
The headline expectation for today’s jobs number was for 231,000 jobs added to non-farm payrolls. Non-farm payrolls came in a bit light at +214,000 but revisions to August and September added another 31,000 bringing the net gain to +245,000, just below the range I am expecting for the next several months. This is a good number, especially in conjunction with the decrease in the unemployment rate to a six-year low of 5.8% and the uptick in the labor participation rate to 62.8% from 62.7%. October was the ninth consecutive month with more than 200,000 jobs added.
New York Fed President Bill Dudley said in a speech today that:
“If all goes according to our forecast and the U.S. economy continues to make progress towards the Fed’s dual mandate goals of maximum sustainable employment and 2% inflation, the Federal Reserve will likely begin to raise its federal funds rate target off the zero lower bound sometime next year.”
So, the Fed obviously thinks things are moving according to plan and is therefore ready to raise rates next year if the economy proceeds apace.
My concern is wage growth. With exit polls saying that just 1% of voters felt the economy was “excellent” while about 70% said the economy was “not so good” or “poor,” it’s clear something is still seriously wrong with the U.S. economy despite the headline numbers. Moreover, I don’t think a recovery without sufficient wage growth can end without significant deleveraging that makes the U.S. economy susceptible to deflation. But right now, the course we are on is one of tightening monetary and perhaps fiscal policy. Let’s hope that the wage growth comes before these policy choices derail growth.
According to Dan Greenhaus, the level of wages in this report was disappointing because hourly earnings increased by only 0.1% m-o-m, bringing the rolling y-o-y rate to 2.0%, just above the rate of inflation. I think this was the important number to watch, and it just wasn’t that impressive. Hours worked are at +2.8% y-o-y. So that’s a good number that somewhat offsets the poor wage growth. Overall, I would say, however, that the October jobs report continues the sense that the U.S. is growing and jobs are being added without concomitant wage growth that will help keep household debt to income levels in check.
On Japan, I caught a chart from a Martin Wolf missive that I thought was quite astonishing.
The Martin Wolf message was as follows:
So what lessons should others, particularly the European Central Bank, learn from Japan’s predicament? The answer is: do not start from there.
The Japanese are where they are for three reasons. First, the Bank of Japan pursued too tight a monetary policy, especially in the early 1990s, to punish the sins of the bubble economy. Second, the government added too rapid a tightening of fiscal policy in 1997. Finally, the Japanese never dealt with structural excess savings in the corporate sector. These mistakes entrenched the disinflationary pressure that the BoJ now seeks to end with its desperate expedients.
All this has strong echoes today in the eurozone. Not least, the dominant attitudes are needlessly punitive. The eurozone has also been unwilling to address the structural excess savings of creditor countries. Yet what the eurozone should remember is that, regardless of economic outcomes, Japan will remain a functioning country with an utterly loyal citizenry. The eurozone does not possess such powerful advantages. It cannot even risk falling into anything close to Japanese deflation. But it is.
I think that’s largely right at the macro level. But I am a bit more fatalistic here. First, I don’t think the Bank of Japan’s tight money was the problem. Second, while the fiscal tightening in 1997 dealt a fatal blow to the economy, I also believe demographics and high private debt made the debt deflationary outcome almost inevitable in Japan. So the structural problems of note are less the excess savings in the corporate sector today and more the excess debt in the corporate sector when secular stagnation first began.
The right approach to Japan’s woes were more about fixing corporate balance sheets quickly than they were about fiscal, monetary or excess savings fixes. Analogously, in the US and Europe, where wages have been stagnant or receding, it’s going to be just as hard to have an enduring recovery given the private debt problem resides on household balance sheets. Fixing household balance sheets is the order of the day.
And I think this goes back to the chart that started my part here on Japan. The central bank has created yen and swapped this base money with existing financial assets, bloating its balance sheet as some sort of fundamental move to jump start the economy. The goal seems to be to increase inflation by any means necessary because deflation is ‘bad’.
The problem with this approach is that it doesn’t lead anywhere. What people want in any economy is money and financial assets that they can exchange for real economic resources in the present and future. We want the means to receive a stream of goods and services that we value. And that’s pretty much it. For the most part, the other stuff is irrelevant.
Think of it this way. I work for a living, meaning I work in exchange for monetary compensation that allows me to buy goods and services that I value. My expectation is that, if I work hard, the stream of goods and services I can expect to receive over time will be as good or better than the stream I have received in the past. And when I stop working, I expect to be able to enjoy a stream of goods and services that, though diminished, is as good or better than what my parents received when they stopped working. We’re talking about food, clothing, housing, entertainment, vacation, drugs, healthcare, and education plus a lot more.
If wages in Japan are stagnant, how is increasing inflation going to help wage earners afford a better stream of good and services. It won’t. And of course, that gets us to the corporate savings issue, where I don’t have a response in the context of today’s policy choices. Right now, at least in the US and Europe, people are talking about lower corporate taxes, which ostensibly means greater savings net of investment. How lower taxes lead to lower corporate savings and more investment, I don’t know. But, again, none of this increases the stream of goods and services I can reasonably expect to obtain.
I don’t have any answers here in the context of the current policy choices being debated. Currency devaluation is beggar thy neighbor in a zero sum game of trade and not a lasting solution. It might be a jump-start, but it is nothing more. Ultimately, what we need to see are policies which maintain wages for median and lower-income wage earners with the greatest marginal propensity to spend. Without this, in a demographically challenged and indebted private sector, so-called secular stagnation is almost a certainty.