June 8, 2015
Job growth is on the side of the hawks at the Federal Reserve. Nonfarm payrolls increased by 280k in May, nearing the high end of forecasts by a pool of economists, and March and April were revised upwards by 32k. Any growth figure over 200k per month for a prolonged period of time will force the hand of the Fed to raise interest rates for the first time since 2006. However, the figure poorly reflects the success, or lack thereof, from lower income workers. With wages continuing to be anemic, and the underemployed still being a significant part of the economy, I would be surprised to see the Fed raise the Federal Funds Rate this year.
Weak economic figures over the past month made many believe a rate hike was not going to happen this year. The first quarter GDP growth figure was revised to -0.7%, attributed to a strong dollar, weak exports, a port strike on the west coast, adverse weather on the east coast, falling oil investments, weak inventory growth, poor consumer spending, and lower consumer confidence. But the economy is on pace to surge back in the second quarter, or so some economists believe. GDP forecasts are calling for 2-3% growth, depending on how strong of a rebound we see in consumer spending. Many argue that when paired with the May employment report, that the Fed could be forced to raise interest rates as soon as September.
It is fair to question how strong the employment report is. The unemployment rate ticked up to 5.5%, which is a positive, as it indicates the size the labor force is expanding, and depressed workers are looking for jobs again. But is it worthwhile to work at prevailing wages? Hourly earnings increased by 0.3% on the month, and are up 2.3% over the past year, representing the sharpest increase since August 2013. Most would view that as a positive, though compared to the prerecession average hourly earnings growth of 3.4%, the 2.3% remains anemic. Then take into consideration the underemployed. The Bureau of Labor Statistics sees underemployment bringing the total unemployment rate closer to 7%. Such a figure implies the economy needs to create 2.5 million jobs to bring the economy to full employment, the point at which employment should have a greater contribution to price stability. At the current average pace of job growth, we could be a full year away from full employment.
Based on the Fed’s dual mandate of employment and price stability, they will be troubled to raise the Federal Funds Rate this year. The International Monetary Fund further supports the case after their second downward revision to U.S. growth this year. They cited an overvalued dollar, and weak inflation as justification alone. If the Fed wants to see inflation, they need to encourage a higher minimum wage, which has been among the more favorable means of increasing inflation, much to the chagrin of capitalist economists. Low wage earners’ primary asset is their wage, and they spend just about all of it back into the economy. The highest wage earners, who have benefitted the most in the post-recession economy, save too much money to make the economy fully benefit from their economic gains. While many economists argue that minimum wage increases hurt minimum wage job growth, I would be hard pressed to find a minimum wage earner who doesn’t think it’s worth the risk.
About Billy Schmohl:
Billy Schmohl is the Vice President of Investment Information at Alamo Capital. Billy has researched, traded and managed municipal bond portfolios over the past decade. He graduated from the University of Colorado at Boulder with a Bachelor of Arts in Economics and currently holds FINRA Series 7, 63, and 65 licenses.
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