Re: Higher Earnings That Aren't, continued

[john gulick <jlgulick@xxxxxxx>]

If, on the one hand, the U.S. labor market is tight and U.S. average real
wages have been climbing in the last year or so, and, on the other, firms
that operate
in the U.S. can't pass along higher costs to consumers b/c of overseas
competition, how can it be that U.S. firms are racking up restored (if not
record) profits ? Are these U.S.-based TNC's whose rates of return are higher in
their non-U.S. operations, or is this b/c U.S. plants are purchasing inputs
(capital goods, components, raw materials, etc.) from overseas that
have been "cheapened" by the overvaluation of the dollar ? Something's gotta
give (and I mean that in both senses of the expression).

John Gulick

At 01:08 PM 12/8/97 -0800, you wrote:

> Barron's Online -- December 8, 1997
> Day Labor
>
> A surprising factor in hourly earnings
>
> By GENE EPSTEIN
>
> Sudden Impact
>
> Call it the Perfect Report, especially since its apparent
> imperfection is just a mirage. Friday, the Bureau of Labor
> Statistics released its data on November's employment
> picture, confounding Wall Street's expectations and
> gladdening the hearts of those of us in the bleeding-heart
> capitalist camp. In the words of phrase-maker Ed
> Yardeni, the report revealed a hiring panic nationwide.
>
> According to the BLS, the number of nonfarm jobs grew
> by a whopping 404,000 in November, twice the
> consensus estimate of 200,000. At the same time, the
> unemployment rate ticked down to 4.6% from October's
> 4.7% rate, putting it at the lowest level since October '73.
> And even the reported surge in average hourly earnings
> of an annualized 7.2%, a supposed harbinger of
> wage-push inflation that helped roil bond prices, turns out
> to be the one figure that just ain't so. If not for distortions
> in the way the BLS calculates the data, the real increase
> would be roughly half that, or about 3.6%.
>
> My authority on this is Brian Garvey, a 28-year-old
> graduate student at Boston University. Garvey has
> completed a study showing a strong bias in the monthly
> estimates of average annual earnings that correlates with
> a certain quirk in the calendar. A call to BLS division chief
> Patricia Goetz turned up the interesting news that the
> agency acknowledges the problem and is in the "early
> stages" of looking into it. But until this work is completed
> (and may that day come soon), it's important to
> understand just how this closely-watched indicator is
> being buffeted by the number of weekdays there happen
> to be in any survey month. In fact, listen closely and you'll
> see how I'm able to predict that next month's estimate for
> average hourly earnings should show a zero increase or
> even a decline, simply because December will have 23
> weekdays and November had 20.
>
> Uncanny? For sure, but as any schoolboy knows, there
> can be 20 to 23 weekdays in a month, leading to
> differences in days between one month and the month
> before of -3, -2, -1, 0, 1, 2, and 3 days. For instance,
> since November had 20 weekdays and October had 23,
> November was a "-3" month. And since, as noted,
> December is a 23-weekday month, it gets a 3 label.
>
> Now look at the top chart on this page, which shows a
> striking picture: The change in average hourly earnings
> as reported by the BLS has been closely correlated with
> this weekday differential. In fact, based on 87
> observations from January 1990 to April '97, Garvey
> found that the average annual increase in months labeled
> -3 has run about 6%, while in 3 months it's averaged
> about zero. And notice that a similar yawning gap exists
> between -2 and 2 months.
>
> Now, unless we're to believe that this New Age economy
> has brought a peculiar numerological method to the way
> the nation's bosses bestow raises, something else must
> be going on. BLS chief Goetz believes it's happening in
> her own backyard, but she's not quite sure what it is. In
> her opinion, it probably has something to do with the fact
> that a number of the reporting firms pay their workers
> salaries on a semi-monthly or even monthly basis. The
> workers involved are professionals, like journalists and
> economists. The agency must then convert those data
> into an hourly rate, and it's apparently forced to use the
> calendar in order to do this.
>
> As noted, I wish the BLS luck in working through this
> particular morass. Meanwhile, the second chart on this
> page, which shows exactly how the next 13 months fall,
> should prove a useful guide to the monthly ups and
> downs of average hourly earnings. Since December '97 is
> a +3 month, look for a near-zero change.
>
> But let's return to the good news the agency can be
> trusted with. November's employment gains in the private
> sector were widespread, with especially large increases
> in manufacturing, services and retail trade. Manufacturing
> added 44,000 jobs, marking the third month out of the last
> four in which this sector has had a large increase. More
> than 200,000 manufacturing jobs have been added since
> the industry's last employment trough in September '96.
> Pacing the strength in manufacturing, wholesale trade
> added 24,000 jobs, mostly in durable goods. Despite
> November's unusually cold weather, construction
> employment rose by 29,000. And to cap it all off the good
> news, government employment was unchanged.
>
> At this point, good news for jobs is usually interpreted to
> mean bad news for inflation, but on that score more sober
> thinking should prevail. To begin with, it's worth noting
> that Fed Chairman Greenspan's favorite indicator of labor
> militancy, the "quit rate," fell in November, from 11.2% of
> the unemployed to 10.4%. For the uninitiated, this
> involves the take-this-job-and-shove-it types who were
> confident enough to abandon their situations without
> having another one lined up-what the BLS calls "job
> leavers." When the chairman originally sounded the alarm
> about the rising quit rate, it stood at 11.3%. So despite
> the tight labor market, workers are maintaining that
> humility to which the 'Nineties have been accustoming
> them.
>
> Moreover, the Asian contagion will not only continue to
> bring increased disinflation to our shores when it comes
> to prices, but when it comes to wages as well. That's
> because currency devaluations make the Asian worker
> cheaper in relation to his American counterpart. And as
> noted above, the recent increase in average hourly
> earnings is somewhat exaggerated and will likely show a
> downside correction come next month.
>
> But even so, the laws of supply and demand have not
> been repealed. With labor scarcities fairly widespread,
> wages have been rising and will continue to do so as
> long as the unemployment rate remains as low as it is.
> But whether this will lead to a ratcheting up of inflation is
> another matter. A recent study from the New York Fed
> has shown that in the goods sector of the economy,
> increases in the rate of compensation growth simply
> doesn't lead to higher prices, and that in the service
> sector, the relationship is fairly weak. That's because
> goods-producing firms no longer have pricing power,
> bedeviled as they are by global competition, and many
> service-producing firms always did have to exist in a high
> competitive environment. So as much as they may want
> to hike prices in the face of rising wages, they simply
> can't.
>
> This lack of pricing power means that, in order to absorb
> higher wages, companies will either find new ways to
> boost productivity or will simply have to eat it in terms of
> lower profits. But as Wall Street knows even better than
> Main Street, earnings are more than healthy, and if some
> erosion starts to set in, the companies affected won't be
> declaring bankruptcy anytime soon.
>
> Greenspan should keep his eyes on the ball. The Great
> American Job Machine is vital for addressing the main
> priorities of our time: to reduce crime, to push people off
> the welfare rolls and onto the employment rolls, and to
> help narrow the widening gap between rich and poor.
> Seeing it do its thing is cause for cheers.
>
> Postscript: Wrightson & Associates chief economist, Lou
> Crandall, inspired by Brian Garvey's finding about the
> calendar-quirk-driven average hourly earnings, has found
> another such quirk. For some reason, changes in the
> average workweek as reported by the BLS are correlated
> with the number of days in the survey month. In months
> with a relatively greater number of weekdays, the
> workweek is biased upward. Since that's true of
> December, look for an upward bias in the next report.
>
> But just to confirm that the gods had not gone completely
> crazy, Crandall did another kind of test and has
> reassuring news: The number of weekdays in a month
> shows no correlation at all with the change in nonfarm
> payrolls.
>
>
> E-Mail: gene.epsteinnews.barrons.com
>Copyright © 1997 Dow Jones & Company, Inc. All Rights Reserved.
>
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