There was more bad news for the Federal Open Market Committee last week beside the estimate of zero percent economic growth from a year earlier.
If the labor market were truly growing as is claimed, we should be finding inflation in a broad set of different economic data, ranging from standard measures of prices to various estimates for wages.
The major employment series have been in overdrive for more than two years now — plenty of time to digest any lagged effects of massive labor gains.
The Bureau of Labor Statistics
’ survey of business hiring, also known as the “establishment survey,” picked up at the start of 2014, with March reaching 272,000 new hires and April posting 310,000 added jobs.
Those numbers suggested the economy had shaken off 2013’s uncertainty, including the drama from the Fed’s tapering of quantitative easing and the related financial disruptions.
Where Is Labor Market Inflation?
Since that time, at best we have found only uneven and temporary suggestions that anything might be different with regard to inflation and economic slack.
Early in 2015, the BLS’s Employment Cost Index
picked up sharply in the first quarter, rising to 2.6 percent from a year earlier — seemingly providing the needed evidence for the prevalent optimism about “overheating” at that time.
That was how it was spun, as economist after economist claimed that the rise was the definitive arrival of ultimate monetary success.
But that bump disappeared as quickly as it showed up, as the rest of the year dropped back again to 2 percent, which seems to be the attractor level for this index. The latest update in the ECI for the first quarter of this year 2016 is slightly less still at just 1.9 percent.
At less than 2 percent, the increase remains 1.5 percent below the average of the pre-crisis period when the economy last appeared to be matching expectations provided by the unemployment rate.
There has been a small increase in the subcomponent for wages and salaries, but it isn’t clear if that is significant especially since it is more than fully offset by a decline in measured gains in employee benefit costs.
At best, it suggests that employers are still as cost attentive as ever and if they are deploying even modest wage increases they are immediately and completely compensating wherever else possible.
That does not suggest the end of slack or a highly competitive labor environment.
In the broader economy, calculated inflation through the Fed’s preferred metric, the PCE Deflator
, continues its astounding underperformance. To my knowledge, the Federal Reserve has yet to disallow its own ability or remove its inflation target, and yet the PCE Deflator fell below 1 percet year-over-year again in March.
That represents the 47th consecutive month below the set 2 percent inflation target, meaning that as powerful as the Fed supposedly is in mainstream lore it has a very peculiar way of showing it.
That is even more curious given that there were two additional rounds of quantitative easing of about $1.7 trillion in tandem with continued interest rate “accommodation” the entire 47 months.
It all adds up to a dispositive lack of evidence for either the recovery or monetary competence.
The 2 percent target, whether or not you agree with the intention, is the primary task given to the agency.
A four-year deviation is not some temporary problem to be waited out — it is indicative of serious disruption in the expected monetary flow. It again points out that the Fed really doesn’t know what it is doing. That there would be only worsening economic circumstances alongside that structural deformation is unsurprising.
Going four years without hitting your inflation target, and actually having your preferred inflation measure only get further away, despite $1.7 trillion in additional “money printing” can only mean that central banks aren’t what they are made out to be.
That possibility does seem to be creeping into the mainstream conversation, as broken expectations can only foster blind faith for so long.
Wall Street economists can continue to insist that all is well and orthodox economics not at all disproved, but all the evidence points to something else entirely.
is head of global investment research for Alhambra Investment Partners. To read more of his work, CLICK HERE NOW.
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