All Things in Moderation

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up.

The economy added 128,000 jobs in May according to the ADP Employment Survey. This was below expectations and is lower than the Street 325k estimate for tomorrow’s jobs report. “Under a backdrop of a tight labor market and elevated inflation, monthly job gains are closer to prepandemic levels,” said Nela Richardson, chief economist, ADP. “The job growth rate of hiring has
tempered across all industries, while small businesses remain a source of concern as they struggle to keep up with larger firms that have been booming as of late.” You can see the the “tempering” of jobs growth in the chart below.

Productivity declined 7.2% in the first quarter, according to BLS. This is the biggest drop in productivity since 1947. Declining productivity is generally an inflationary indicator, as firms are making less with more resources. Unit Labor Costs rose 12.6%, which is a function of declining productivity and rising wages. The chart below shows inflation (red line) versus unit labor costs (blue line). In a lot of ways, the current environment is reminiscent of the late 1960s, where a tight labor market, profligate government spending, and easy money combined to create the 1970s inflation.

The thing to keep in mind is that inflation is a ratchet – the higher prices often do not decrease – they create a new plateau. So if prices increase 6% and wages increase 4%, it will take a while for wages to catch up, and in the meantime people will be worse off.

Job openings decreased to 11.4 million, but are still at close to record levels. Layoffs hit a record low of 1.2 million, while quits edged down slightly to 4.4 million. Separately, 200,000 people filed for initial unemployment benefits last week. The labor market remains strong, and that should bolster the economy going forward.

JP Morgan CEO Jamie Dimon got the market’s attention yesterday when he warned of an economic hurricane. “You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane,” Dimon said Wednesday at a financial conference in New York. While conditions seem “fine” at the moment, nobody knows if the hurricane is “a minor one or Superstorm Sandy,” he added. “You’d better brace yourself,” Dimon told the roomful of analysts and investors. “JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”

He is primarily worried about the Fed’s quantitative tightening, or the reversal of its bond buying program. He is right that we are in uncharted territory here. The last time the Fed tried quantitative tightening, it caused major disruptions in the money market. That was during an environment of benign inflation, so the Fed was able to reverse its policy easily. That might not be possible this time around.

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