Professional Documents
Culture Documents
2017. 7. 10
I. Introduction
There was lots of good news in the employment numbers. The non-farm payrolls numbers were
well above expectations. The participation rate increased, resulting in the unemployment rate
increasing very slightly. Finally wage inflation was very well restrained. The combination of
these increase the probability that the FOMC will not raise rates in September, although they may
decide to begin reducing the size of the B/S at that time, both consistent with the conclusions of the
June 14th Instant Note.
Bruce Kasman’s monthly conference call on the employment data was unusually good, I have
excerpted comments below. These often represent what appear to be his real immediate reactions
rather than the sometimes more consensus like written comments by his colleagues thereafter. For
comparison, I have included selected comments from his colleague Mike Feroli’s report “Good
hours, but bad pay”.
inflation numbers are going to move back toward the trajectory that we and the Fed are expecting. . .
The government sector, where you had the biggest rebound, with a big increase in state and local
employment, which does suggest some rebound, maybe not in the 2Q, but in the 3Q, in a sector
that has definitely been holding back GDP growth. The wage inflation story is one in which there
really isn’t much pressure, a little less than we expected and there were downward revisions. This
is not really any kind of pressure, but it’s not something to be worried about in terms of labor income.
We’re running about 5% on the payroll proxy, a solid number for the 2Q, particularly with inflation
readings on the low side. I tend to not put too much weight on the unemployment rate increase; I
don’t think that changes the picture that we’ve got a tightening labor market. . . We have continued
to get a string of low inflation readings. We’re solidifying the case for a rebound in growth. Most
important in the first half of the year is the cap-ex rebound; boosted by a rebound in the energy sector.
Inventory is not showing any building in the 2Q; that is surprising us – should be a positive in the
3Q . . . The issue linking core inflation and growth is whether tight labor markets are going to drive
higher inflation; it’s in our forecast. We’re looking for that to bring the run rates on inflation back
closer to 2% in the 2H2017. On the growth side, we’re pretty comfortable with our forecast. On
the inflation side, it’s harder to be all that comfortable. There may be a story that’s more
fundamental with the persistence of low inflation – the global drags which look like they’re fading,
may continue to have some lingering effect. We have to ask the question ‘What happens here if
core inflation does stay low?’. This will raise questions for the Fed. If it’s linked to low wage
inflation even with tighter labor markets, it’s going to raise questions, about the structure of the
economy and about the underlying nature of the Philip’s Curve. If we get a situation where the
next few months delivers low core inflation readings, in the range of 0.1% on a monthly basis that
will probably be enough to give the Fed reason to pause on the 2H tightening. The rate story does
depend in an important way on getting a clear signs that there’s an upward trajectory in inflation.
That’s more uncertain at this point.”
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Global View
continues despite tight labor conditions. Bruce also pointed out concerns about low reading in the
owners’ imputed rent category in the CPI.
With energy prices having trended down throughout most of the 1H2017, it is likely that at some
point they will get so low as to cut into energy sector cap-ex. This puts downside risk in JPM and
the consensus growth forecasts, which may add to the dis-inflation concerns.
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