Economy: Small Wage Gains Despite Tight Labor Market - Dr. Sung Won Sohn Chief Economist- Wells Fargo:
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Economy: Small Wage Gains Despite Tight Labor Market
Despite labor shortages, a lot of workers are coming out of the woodwork. New workers are coming from immigrants, the disabled, prison inmates and retirees (Chart 1). The payroll data, which recorded 1.1 million new jobs since June could be misleading; the household survey from which the unemployment rate comes, shows only 653,000 newly employed persons during the same period.
Why aren't wages going up faster? More of the workers pay is in variable compensation such as bonuses and stock options (often not a part of the wage data) instead of the traditional fixed pay (Charts 2-5). Those workers who are willing to jump ship to another job are getting huge pay hikes; the quit rate in the labor market jumped to 14.6% in November from 13.4% in October. While those who move are getting hefty pay increases, the loyal workers who stay at present jobs are getting much less. Not surprisingly, the average pay increase of the newly hired with fancy pay hikes and the loyal employees with small pay raises has been meager. The disparity in pay-gap among workers is creating morale problems within some businesses. The quit rate is likely to rise and average labor costs including variable compensation should rise at a faster rate, contributing to higher inflation.
Bonds: Attractive Buys Even Though Yields Have Not Peaked
Bond yields will not peak until there are convincing signs of an economic slowdown and lessening credit demand. An economic slowdown requires a sustained stock market correction. Without the help of Chairman Greenspan, there will not be a stock market correction. At the moment, there is no meaningful sign of an economic slowdown. The economy and the stock market have shrugged off the slow motion monetary policy. However, the New Year could be a different story. The Federal Reserve will ratchet up interest rates. Eventually economic growth will decelerate. The long awaited correction in the stock market could come, helping bonds.
Even though bond yields have not peaked, we continue to recommend purchases of bonds based on attractive valuations, the best since the bloodbath in 1994. If bond yields rise, valuations will be more attractive. In recent weeks, the spreads of Corporates, Mortgage-backed, Agencies and Tax-exempts over Treasuries have decreased as the liquidity concerns related to Y2K have diminished; still these securities are attractive and the spreads are likely to narrow in the New Year.
Stocks: Worries for the New Millennium
The combination of robust economic growth and low inflation as well as the slow motion monetary policy has been good for stocks. But the new millennium could bring some headaches to the market. Tighter monetary policy will gradually squeeze economic growth, hurting corporate profits. The technology and internet stocks, whose valuations have soared to the stratosphere, could be vulnerable to higher interest rates and economic slowdown. The global economic recovery has been positive for corporate profits, but the flow of funds away from the United States, the weaker dollar and the intensifying competition for limited global savings are worrisome factors in the New Year.
Best Regards, J.T.
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