08 May 2018, 16:25 GMT
Immediately after World War II unemployment in the US fell to 2.5 per cent. But by 1954 it had risen to 6 per cent and has never returned down to that level.
The lowest since then was 3.4 per cent in the strong economy of the 1960s, but subsequent unemployment has been much higher, reaching peaks of 9 per cent in 1975, 11 per cent in 1982 and 10 per cent in 2009.
Only in the year 2000 tech bubble has unemployment ever dipped below 4 per cent, averaging 3.9 per cent that year (plausibly due to all the extra IT workers needed to ensure that the dates on the world’s computers wouldn’t cause crashes after the millennium - remember the Y2K project?)
Muted wage growth
So last Friday’s unemployment release of 3.9 per cent represents the lowest level of unemployment since the 1960s.
Economic textbooks tell us that low unemployment triggers higher wage growth as companies must offer a greater incentive to keep workers. Yet wage growth continues to remain muted.
Friday’s average hourly earnings figure, which accompanied the unemployment rate, unexpectedly dropped to just 2.6 per cent. This earnings figure is only $0.01 away from being rounded down to 2.5 per cent year-on-year.
Remember, this year’s equity price drop was initially triggered by a high hourly earnings release of 2.9 per cent in January. The market thought this was the start of the wage rising cycle, which would mean more consumption, leading to higher inflation; and hence a more hawkish Fed.
But we’re now meaningfully off that. That high reading, along with much of the wage data over the last 18 months, has been revised down, and Friday’s release was the lowest so far this year.
The inflation conundrum rumbles on: Whilst the unemployment rate has dropped from 9 per cent to 3.9 per cent over the last six years, inflation has been virtually constant, fluctuating around 2 per cent by only +/-0.3 percentage points.
It looks from the data going back to the 1950s that the textbook theory I espoused above is asymmetric: inflation drops in a slowdown, but doesn’t rise when the labour market is tight. Inflation appears to be more dominated by secular moves in demographics, globalisation etc.
Bullish data for equity markets
Friday’s data says to me that the US economy is still growing, but without inflation. For me this is yet more bullish data for the equity market. Investors aren’t fearing a slowdown, they’re fearing too many rate rises (which is why the market took the January jump in earnings so badly).
Yes, the market did respond positively on Friday, but I’m expecting more; I’m expecting the February price drop to be reversed since the fear factored in at that time looks less likely now.
Similarly it’s also hard for me to believe bond yields will be rising significantly either.
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