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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (71944)	12/16/1999 11:05:00 AM
From: Les H	Respond to of 132070

CAPITAL GAINS SOAR RELATIVE TO EARNED INCOME John Lonski, Moody's senior economist in New York Amid a tight labor market, the more bonds rally in response signs of contained inflation risks, the greater is the danger that lower interest rates spark an upturn by expenditures which is capable of quickening price growth. If domestic expenditures accelerate, the demand for labor will rise and wage and salary growth should escalate. Until the labor market slackens sufficiently, the downside potential for Treasury yields appear to be quite limited regardless of how favorable the inflation news might be. Neither do new record highs for the US' major stock price indices improve prospects for Treasury bonds. More news of an upbeat holiday shopping season and further gains by industrial commodity prices might soon reverse the drop in Treasury yields following from November's mellow employment report. Equity prices soar higher in a manner that offers no hint of how US corporate credit rating downgrades outrun upgrades by a wide margin, especially among high-yield issuers. Nevertheless, the yield spreads of both investment- and speculative-grade corporate bonds have narrowed. Investors are more confident about the adequacy of profitability in 2000 and Y2K jitters have faded, even among holders of securities from emerging market countries. In no small way, the robustness of US consumer expenditures can be ascribed to the US' equity rally of unprecedented magnitude. Stock price inflation has created wealth in a manner never seen before. Millionaires have become commonplace. During the 3-years ended 1999, the price appreciation of equities and mutual funds owned by households has approached 36% of wage and salary income. On average, the great equity rally has supplied Americans with a sizable bonus enough to about 36% of their earned-income during the last three years. Prior to the late-1990s, the appreciation of household owned equities and mutual funds had never before topped 20% of wages and salaries over a three-year span. The appreciation of equities and mutual funds did get as high as 20% of wage and salary income during 1963-1965. For 1964-1966, the average annual growth rate of real consumer spending would reach a stratospheric 6%. In response to this breakneck pace of household expenditures, the annual rate of core CPI inflation would climb up from the 1.6% of December 1964 to 3.3% by December 1966. Rampant stock price appreciation and a tight labor market remind credit market participants to be on guard for faster CPI growth. A jarring slowdown by US consumer spending may require a sudden and lasting 20% plunge by the broad equity indices. Who would have thought that the S&P 500 stock price index would hurdle over 1999-to-date's 159 basis points jump by the 10-year Treasury yield and post a 15% gain? A peak for bond yields cannot be declared with confidence until the stock market stumbles badly. November's employment report was mostly as billed with the one important and puzzling exception being the meager 0.1% monthly rise by average hourly earnings. Despite how the unemployment rate declined from August 1998's already low 4.5% to November 1999's near 30-year low of 4.1%, the hourly wage's annual increase has declined from the 4.3% of the quarter-ended August 1998 to the 3.7% of the quarter ended November 1999. Business behavior usually responds with a lag to changes in its operating environment. Few, if any, macroeconomic measures can turn on a dime. Special note should be made of how the annual growth rate of the average wage peaked just when the global crisis of 1998's second half was putting considerable downward pressure on revenues, product prices, and profits. In view of how the latter three categories now rise higher, perhaps it will not be long before average hourly earnings re-accelerate. Competition For Workers Can Only Intensify A number of retail establishments have been posting help wanted signs to assist with the annual onslaught of Holiday shoppers. A dearth of available labor may explain November's unexpectedly deep 67,000-worker decline in retail employment, which was the sharpest monthly fall since recession-plagued January 1991. The retail jobs oddity suggests that November's 234,000 addition to confirm payrolls shortchanged the underlying growth of the demand for labor. Difficulty finding qualified staff may intensify. Indications of labor market tightness in the monthly jobs report extend beyond just the unemployment rate. When the number of job candidates available to fill openings dwindles, the greater is the pressure to enhance compensation. In the three months ended November, this pool of available workers contracted 7.7% annually, which was deeper than the 4.5% yearly decline of the quarter ended Augusts. Since interest rates peaked near the end of 1994, the pool of available workers has fallen at an average annual rate of 5.9%. November's weak showing by retail employment may be partially explained by more lucrative job prospects elsewhere. Further improvement in the profits outlook may compel more businesses to add staff rather than forego earnings opportunities. An acceleration of US corporate profitability should enhance the demand for labor just when a declining pool of attractive job candidates would by itself put upward pressure on wages. When the annual drop in the pool of available workers last bottomed with the 10.3% contraction of 1997's final quarter, the yearly growth rate of average hourly earnings would subsequently firm from an already steep 4.1% to its latest peak at 4.3% in the second quarter of 1998. Fat Wallets Heighten Consumer Confidence Despite a modest and probably understated 0.1% increase in hourly earnings, concurrent gains of 0.2% for confirm payrolls and 0.3% for hours worked produced a 0.6% November increase in the employment report's proxy for earned income. When the monthly rise in this estimate of income climbed from September's 0.2% to October's 0.8%, the monthly change of wages and salaries would simultaneously rise from 0.4% to 0.6%. Over the last ten years, the 0.4% average monthly increase in the earned income proxy nearly matched the average 0.5% rise in wage and salary income. The record shows that a 0.6% monthly gain in the earned income proxy over the last ten years coincided with an above average 0.6% rise in wages and salaries. Mostly because the boost to household cash flow from a wave of mortgage refinancing should wane, the pace of consumer spending is likely to slow toward the growth of wages and salaries next year. However, the latest stock price surge might lengthen the stay by the faster pace of consumer expenditures relative to personal income. A continued slowing of consumer spending should not be overly damaging to corporate credit worth if a stronger global economy compensates by boosting exports. However, to the extent that a tight labor market threatens to reawaken wage inflation, a further tightening of monetary policy could begin to strain corporate cash flows via both higher borrowing costs and slower sales. Labor Seems To Be Taking The Upper Hand A lack of qualified workers may prevent a climb in hiring activity. Employment growth has slowed notwithstanding a rebound in corporate profitability. Concurrent with a decline in the yearly change in non-bank corporate recurring profits from 12.3% in the third quarter of 1997 to -0.4% in the in 1998's third quarter, the annual advance in private sector payrolls would slip from 2.8% to 2.7%. Notwithstanding a subsequent firming of recurring profits to the 8.9% yearly rise of 1999's third quarter, private sector payrolls expanded by just 2.2% annually in the three months ended November for the flattest such rise since the quarter ended May 1996. Private sector jobs growth now stands well below the 2.7% average since 1992, or about the time the bulk of corporate restructuring was completed. An acceleration of economic activity abroad would enhance corporate profitability via an increase in exports and a firming of business pricing power. Currently low rates of capacity utilization can only broaden the upside potential for corporate earnings growth. When the yearly growth of non-bank profits last rose from 9.4% in 1996 to 12.5% in 1997, private sector payrolls would concurrently jump from 2.3% to 2.9%. Gap Widens Between Industries Hiring Less The Number Firing November's 0.3% monthly increase by total hours of work outpaced the accompanying 0.2% expansion of confirm payrolls. In conjunction with a jump by the quarter-to-quarter annualized increase of hours-worked from the 1% of 1999's second-quarter to the 2.7% of the third quarter, the corresponding rate of real GDP growth soared from 1.9% to 5.5%. If December's monthly increase for hours-worked does nothing more than match its 5-year average monthly rise of 0.2%, hours-worked would then expand by 2.5% annualized from the third to the final quarter. In turn, real GDP would post at least a 4% quarter-to-quarter annualized advance during the millennium's final three months. In November, the number of industries adding workers held the widest lead over the number of industries cutting stuff since April 1999. When the employment report's diffusion index tops 50, more industries are hiring than firing and vice versa. November's score of 58 gave the employment diffusion index a 56.6-point average for the quarter-ended November. When wage growth was forming its latest peak, the employment diffusion index averaged 60.6 during the 12-months ended June 1998. Part of the moderation of wage growth might be explained by the employment diffusion index's subsequent decline to the 55.7-point average of the 12-months ended November 1999.