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Real Employment Numbers Portend Inflation

One of the most lamented statistics coming out of the employment data is that the shrinking labor force participation rate, not increased hiring, is causing the fall in the unemployment rate. Does this foreshadow a weakening economy? When raw data are manipulated, massaged and sent through computer systems that smooth, enhance and add and subtract from that data, their monthly movements are unlikely to be meaningful.

Massaged Data

As John Williams of Shadowstats.com has documented, we know we can’t believe the CPI-U as a measure of the cost of maintaining a standard of living, so why would we put a lot of credence in the monthly movement of the heavily massaged employment release?

After all, the Bureau of Labor Statistics employs a “Birth-Death” model that originated in the 1990s, which adds about 50,000 jobs per month because the sampling process does not adequately cover small business. Unfortunately, today’s economic conditions are different than those of the 1990s.

The BLS also recalculates seasonal factors every month (called “concurrent seasonal adjustment”). The process actually changes all of the past monthly data year to date. So, the September release of the August data actually changed all of the employment numbers back to January.

However, the BLS only reports two previous monthly revisions. As a result, it is possible that their latest data are simply catching the weakness of the first two quarters. Because of the data manipulation, it is highly unlikely that the employment numbers could catch a turning point in the economy.

Unmassaged Data

Rather than looking at the U.3 or U.6 unemployment series to get a gauge on the underlying employment strength, it may be more beneficial for investors to look at other employment data that is unmassaged.

The August ISM Manufacturing Index was 55.7 (49.0 in May, 50.9 in June, and 55.4 in July). Anything over 50 means expansion. The Employment sub-index was 53.3, down slightly from July’s 54.4, but up significantly from June’s 48.7.

The ISM Non-Manufacturing Index was 58.6. This is the highest reading in the history of the series (began January, ’08). The sub-index for employment in this series rose to 57.0 from 53.2 in July, and now showing growth for 13 straight months.

Initial claims for unemployment have been in a steady and steep downtrend since 2010. For the week of Aug. 24, they were 323,000. A year ago, they were 368,000, and over 400,000 in 2010 and 2011. Just as a reference, this series was at the 320,000 level in 2007. A look at the continuing claims series shows a similar downtrend.

The JOLTS Report (Job Openings and Labor Turnover Survey) for the private sector shows a steep rise in job openings, now higher than at anytime since 2008; voluntary quits are on the rise; and layoffs and discharges are near the lows for the life of the index, which began in December 2000.

In the employment report itself, the workweek expanded by 0.1 hours and overtime jumped by 0.2 hours. In addition, average weekly earnings rose 0.5% in August (these are unmassaged data points).

There are two significant comments in the Fed’s just released Beige Book, a summary of trends from early July through late August, worth noting: 1) “Some firms have become increasingly willing to negotiate salaries;” 2) “Reports from a few Districts highlighted significant labor supply constraints, and, in some cases, large compensation increases for workers with specialized skills …”


When the whole picture is viewed: 1) there is a shrinking labor force; 2) aggregate demand is increasing; 3) skills are unavailable to fill the job openings (specialized skills are at a premium); 4) wages are beginning to rise; and 5) new investment by corporations over the past five years has been at at a five-decade low (they’ve kept it all in cash). This is a recipe for wage-induced, cost-push inflation and shrinking corporate margins.

Despite the employment report, the labor market has tightened and the economy is growing; as a result, expect the Fed to announce its “tapering” plan next week.

As we found out in the 1970s, once started, cost-push inflation is hard to contain. The Fed may soon get its wished-for 2.5% inflation rate (even using the downwardly biased CPI-U measure). However, the wage-induced inflation is not likely to stop at 2.5%, just because that is the Fed’s target!

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.

Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.


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