“When I’m in training, I eat no solid food except hot dogs for six weeks”
–Joey “Jaws” Chestnut – 10 Time Nathan’s Hot Dog Eating Contest Champion and #1 Ranked Competitive Eater.
Gas station hot dogs are the quintessential culinary value trap.
Sure, they’re cheap but do you really want to own the (stomach) capitulation risk that comes with it?
Substitute ‘European Growth’, ‘China Macro’ or ‘EM’ for “hot dog” and you have yourself an investible, thematic pre-holiday market metaphor.
Back to the Global Macro Grind…
This morning’s note is just going to be a brief exercise in rhetorical analytics.
I’ll describe a set of prevailing conditions and let you conclude what that data mosaic implies for the forward outlook. I’ll then offer some thoughts around specific implications and countervailing dynamics.
Because the June Employment Report (along with Tariff implementation) headlines this week’s fundamental macro menu and AHE remains the main course, let’s marinate in some labor market analytics.
Here’s your organic, gluten-free, non-gmo wage growth contextualization appetizer:
Production & NonSupervisory Workers = +2.8% Y/Y in May = fastest Pace of the cycle.
- Context: The Production and Nonsupervisory series represents the lone data set with long-term historicals and it remains a reasonable proxy for aggregate trends. BLS estimates production and nonsupervisory workers represent ~80% of the Total Labor Force.
NFIB Small Business Compensation = 35 level on the Index = All-Time high
- Context: An all-time high on the Small Business Compensation series may not be what it used to be on a nominal basis, but it’s difficult to argue it’s not directionally indicative.
Employee Wages Series in the Regional Fed Surveys = 29.2 in the latest composite reading for June = All-time high
- Context: Our composite is just an equal weighted index of the Richmond and Dallas Fed series on employee compensation. Like the NFIB data, it may not be what used to be on a nominal basis but outright dismissal of an all-time high seems like poor risk management, particularly in the face of corroborating data.
Weekly Earnings for those with less than HS diploma = +10% Y/Y in 1Q18 = fastest pace of the cycle
- Context: Weekly earnings for workers with less than a high school diploma rose at the fastest pace since 2008 in 1Q18. In 2008, the gain was a function of hoarding of low cost labor. Late in an expansion, however, the gain would be consistent with deepening labor scarcity and output pushing up against productive capacity. Whether 1Q18 was a headfake or harbinger remains an open question but it will be interesting to monitor as employers continue to troll deeper down the labor quality supply chain.
Job Switcher Wage Growth = Running at ~4% Y/Y the last couple quarters
- Context: Wage growth for those switching jobs is currently running ~4% Y/Y and accelerating … representing a sizeable premium to the national average and underscoring the reality of deepening labor scarcity, particularly for workers with in-demand skills
Employment Cost Index (ECI) = +2.74% Y/Y in 1Q18 = fastest pace of the cycle
- Context: Both the Total Compensation and Wages & Salaries series in the ECI continue to accelerate to new highs.
U6-U3 Spread = 380bps in May = tightest spread of the cycle
- Context: The U3 Unemployment rate is the benchmark measure and the one you hear quoted every month. The U6 Unemployment rate adds on discouraged and marginally attached workers as well as those who are part-time but would rather be full-time. Late in an expansion when the economy is reaching full employment and the unemployment rate (U3) has troughed at some low level, it becomes increasingly likely that unemployment has hit its “natural rate” floor. If the U3 rate is at its lower bound, the spread between the U3 and the U6 rate becomes a reasonable proxy for remaining cyclical slack in the labor market. The current spread is now below the longer-term average and right at the point where wage inflation begins to hook higher, non-linearly.
So that’s a smorgasbord cross-section of domestic wage data and you’re free to conclude what you’d like, but I’d submit the notion that wage inflationary pressure is not (finally) beginning to percolate is becoming an increasingly difficult one to argue.
It’s important to remember also that the data must be properly considered within the historically consistent empirical reality that the slope of compensation growth steepens late in the cycle, every cycle.
To be clear, we’re not saying earnings growth step functions higher tomorrow (or in Friday’s Jobs report). Hourly Wage growth could be up notably on June. It could also slow.
Indeed, annoyingly trudging improvement is a defining characteristic of the present expansion (it’s also why it’s lasted so long).
The reality is that making a convicted, point estimate call on some grand entrance emergence is silly and handicapping the probable temporal progression of wage growth on a trending basis is a balance-of-risks exercise.
What we would say is that the preponderance of data is directionally indicative and that the balance of risks have seemingly (finally) shifted in favor of late-cycle acceleration.
Before closing, allow me to quickly pivot to yesterday’s ISM data for June as it was serving as a proxy of sorts for the Employment release with investor’s continuing to tea-leaf for nascent signs of trade policy angst flowing through to the real economy.
In other words, are businesses pulling back on hiring, seeing reduced export orders or changing capex plans due to policy uncertainty?
With Current Production & Export Orders up, Employment static and Backlogs & New Orders holding the 60-line, the short answer is no.
The respondent commentary, however, was littered with tariff related concerns, raw material and transportation cost unease along with other angst around broader capacity constraints. But as Powell professed, “it has yet to show up in the data”.
Now, the collective focus was on identifying emergent negatives. But the absence of any tangible effects or negative distortions is equally important, particularly if the flavor of the Employment Report is similar.
Continued strength in domestic macro further reinforces the U.S. centric growth narrative, our growth and policy divergence theme and the attendant implications for the U.S. dollar… and our views around EM, China, etc on the other side of that dollar strength.
A few related thoughts before closing:
- After 4 months of accelerating payroll growth (somewhat anomalous for this part of the cycle) the trend will begin to slow again in June (we need +243K on Headline NFP to avoid deceleration). In other words, faster wage growth will again need to shoulder the burden of supporting accelerating aggregate income growth in the service of driving further upside in consumption.
- Consumption growth was underwhelming in May but it was mostly a function of a rising savings rate as aggregate income growth accelerated to its fastest pace in 6 months. Slower household spending is negative from a GDP accounting perspective but it’s difficult to characterize accelerating income growth and improving consumption capacity as negative fundamental developments. Looking forward, spending growth, aggregate income growth and savings rate comps all ease through August so Consumption growth should hold as a support to the prevailing policy stance and the U.S. relative growth call nearer-term.
- The flavor of the ISM commentary is an overture to an interesting potentiality as it relates to wage growth. If global growth is slowing, raw materials and other input costs are rising and the juice to corporate margins from tax reform begins to fade alongside the peak in the profit cycle, the primary profitability lever left to businesses is the labor cost line. That is a not unreasonable counter-perspective on the other side of the Wages Accelerating view. That view probably gets more credible when the domestic growth data actually begins to slow conspicuously.
This is getting long for a peri-holiday session so we’ll end it there.
Remember, always go to bed angry, always drink excessively then hold the M-80 until the very last moment and always choose the gas station sushi #LifeAlpha
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.80-2.93% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Nikkei 213 (bearish)
DAX 12045-12713 (bearish)
USD 93.70-95.30 (bullish)
Oil (WTI) 66.91-76.84 (bullish)
Gold 1 (bearish)
Have a great holiday,
Christian B. Drake
U.S. Macro analyst
