Some pundits are warning that the pickup in job growth should result in wage gains. However, there has been an interesting change to the relationship between hiring and productivity. BLS data indicate that job growth has picked up during the past three months (averaging 237,000 jobs during the past three months). However, Nonfarm Productivity ran at a 1.8% in the fourth quarter of 2013 and is expected to run at a -1.2% during the first quarter of 2014. Productivity growth of -1.2% during a time when the economy was averaging 237,000 jobs per month is almost unheard of.
What we think is happening is that businesses are adding workers instead of adding or replacing equipment.
This is the direct opposite of the trends observed at the beginning of the recovery. During the second half of 2009 (the first six months of the economic recovery) Nonfarm Payrolls averaged -209,500 per month. During that same time period, Nonfarm Productivity averaged a healthy 5.35% (after increasing 8.0% in Q2 2009). Back then, companies were doing more with fewer workers.
Today, businesses are adding workers instead of purchasing equipment. Low wages and the ability to shift workers to ACA health plans, has made hiring workers a more cost-effective option versus purchasing equipment. This could explain why we are seeing job growth without wage growth. If wage demands heat up, businesses might order equipment and pare staffing. There is just not much wage pressure in the economy. That should result in modest inflation pressures. Modest inflation pressures should keep long-term interest rates from rising very far.
Another interesting dynamic is that, unlike in the past, part-time jobs are not acting like a bridge to full-time employment. Instead, part-time employment appears to be a permanent condition rather than a bridge to full-time work. Also troubling was that the biggest demographic group to leave the work force was men aged 35 to 44. This age group represents men during their peak earning years. Could it be that these men find sitting at home receiving government assistance or disability payments preferable to commuting to a low-wage service job? Sadly, it might be a prudent economic decision for many workers to leave the work force.
This does not mean that the economy is not truly expanding. We see signs of growth, both in the data and anecdotally. We can easily envision Q2 U.S. GDP at or above 3.5%. However, we do not necessarily believe that strong GDP growth will correspond with wage growth and inflation pressures as it has in the past. We believe that globalization and technology are game-changers for hiring and wages. Hiring will pick up when it is the most cost-effective way to increase output. Where that hiring occurs depends on wage costs, energy costs, transportation costs, etc.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY
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