Jobs Day Tomorrow: It’s A Wealth V. Wages Recovery

April 4th, 2013 at 3:51 pm

How do we know economists have a sense of humor?  Because we keep forecasting the monthly jobs numbers.

And so, without further ado and with deep humility, I submit that I expect tomorrow’s jobs report to show payrolls up about 170,000 in March, which is below the 193,000 consensus and a deceleration from February’s initial read of 236,000 (ftr, I nailed the Jan number and was way low in Feb).  I expect the unemployment rate to hold where it is at 7.7%

There’s some upside risk to my forecast (the payroll number could come in higher)—real GDP growth for Q1 is tracking around 3% by some forecasts, though GDP drives employment with a lag and 2012Q4 growth was a lousy 0.4%.  And then there’s the wealth effect from the market melt-up.

Let’s contemplate that for a second.  One of the important tensions going on in terms of macroeconomic growth right now is embedded in the wealth vs. wages story.  The stock market’s up pretty solidly over the year driven by corporate profitability and the Fed’s very low interest rate regime (such that the opportunity costs of being in bonds vs. stocks are elevated).

Meanwhile, as the figure below reveals, real compensation is flat.  The figure simply plots aggregate values of real profits and comp since the expansion officially began in 2009SH, with both variables indexed to 100 in 2009q2.

Which one of these series is more of a growth driver?  Clearly, as I show here, the gains from a rising stock market are very narrowly concentrated at the top of the wealth scale, but the broader wealth effect should not be underrated.  People of all income levels feel wealthier and spend accordingly when their 401(k)’s come in with a nice pop.  (I was hanging out with a retired relative last night—a middle-class guy for sure, but one who was spending pretty freely based on recent growth in his wealth holdings.)

Still, most people depend on their paychecks, not their stock portfolios, so one factor behind my below-expectations forecast is that flat line in the graph below (and this is the total amount of compensation in the economy; if you looked at middle and low-wage earners, you’d see real losses).  That, in turn, is a function of the persistance of slack in the job market, so yes–there’s a viscious cycle here that fiscal policy should, but won’t, try to break.

Also, let’s not forget the farshtunken sequester, of which GS forecasters say: “We expect a small hit of roughly 10,000 from sequestration in Friday’s report. Our best guess is that over the next few months the sequester’s direct effect on federal payrolls probably won’t be too much greater than that, though a widespread freeze on hiring across federal agencies could obviously reduce federal payrolls further.”

So stay tuned.  I’ll be on set live tomorrow on CNBC when the numbers come out at 8:30 and will try to get a post up ASAP with first impressions.



Source: NIPA Table 1.12, BLS for CPI deflator.

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