Treasuries traded lower on December’s employment data, the result of the 2.9% increase in average hourly earnings over the last 12 months. This is the greatest jump since the recession ended in June 2009. It is believed job and wage prospects will increase even more following any successful legislation aimed at stirring growth such as tax cuts and reduced regulatory over reach.
Will the economy enter into a period of cost push inflation, defined as the viscous cycle of higher wages that produces greater inflation? Typically such scenarios beget considerably higher interest rates.
I will continue to argue however, the 62.7% labor participation rate (LPR)—near a 37 year low–is suggesting considerable slack in the labor market given the vast majority of the drop in the unemployment rate from over 10% to 4.7% is the result of workers leaving workforce, not strong job creation. If the LPR was around 2008’s level of 66.5%, the unemployment rate would be around 8.5% to 9.0%.
BUT what is the quality of this latent job pool? Does this huge pool of workers possess the skills required? I will write that if there is bona fide welfare reform, many of these chronically unemployed will be forced to be retrained, a retraining either by personal necessity or from companies itself.
If monetary velocity accelerates, the result of a greater demand for capital, demand pull inflation will escalate, which will then assist in greater demand for more skilled workers which in turn will permit retraining. It is the reverse of the last eight years.
Is this why value stocks are outperforming growth for the first time in eight years? Probably.
Last night the foreign markets were mixed. London was up 0.27%, Paris down 0.74% and Frankfurt down 0.53%. China was up 0.54%, Japan down 0.34% and Hang Sang up 0.25%.
