Amid other turmoils, wages persist in their funk
Weekly market view from LMK Wealth Management
JANUARY 12, 2015 – Stocks ended the first full week of 2015 in the red, pulled in different directions by a mixed December jobs report, fresh oil declines, and renewed terrorist fears in the West. For the week, the S&P 500 lost 0.65%, the Dow fell 0.54%, and the Nasdaq slid 0.48%.
The December employment report was released on Friday and it has both good news and not-so-good news. Preliminary data shows that the economy added 252,000 jobs last month, bringing the total new jobs for 2014 to 2.95 million. The headline unemployment rate dropped to 5.6%. While the jobs growth is good news for continued economic growth in 2015, investors are worried about a lack of wage growth, which could put a damper on consumer spending.
This prolonged absence of wage growth is perplexing. As the number of available jobs rises and the pool of unemployed Americans shrink, Econ 101 teaches us that employers should be forced to raise wages to attract and keep qualified employees. However, this doesn't seem to be happening. Inflation-adjusted hourly pay actually fell 0.2% between November and December and ended 2014 just 1.7% higher.
Downward wage rigidity
Why is wage growth so slow? One theory developed by economists at the Federal Reserve Bank of San Francisco posits that "downward wage rigidity," the reluctance of employers to reduce wages in the recession, has created a backlog of pay cuts that's causing many employers to hold back on raises. Until the labor market tightens much more, stagnant wages are likely to remain.[4] So, in the overall calculus of the economy, more new jobs = good, but frozen wages = not so good.
Oil prices continued to plunge last week. Benchmark Brent Crude dropped below $49 a barrel, but closed above $50 on news that the number of U.S. drilling rigs had dropped significantly. The fallout from cheap oil for some North American oil producers, many of which rely heavily on debt to fund projects, is already being felt; Shell announced layoffs of up to 10% of the workforce of an Alberta tar sands project.
A small Texas oil producer filed for bankruptcy protection last week after being turned down for financing by a lender. Given how reliant on credit many oil and gas producers are, more bankruptcies may follow in the weeks and months ahead. If small producers are squeezed out of the market, it could allow oil prices to climb back up to the levels preferred by OPEC nations. On Wednesday, Charlie Hebdo, a satirical weekly newspaper in Paris, was attacked by three gunmen who killed 12 employees. Gunmen later attacked a kosher grocery, killing four others.
Our thoughts are with the victims' families and the Paris community as they grapple with the aftermath of these horrific attacks. The week ahead is heavy with economic data, including reports on retail sales for December and business inventory spending. A significant number of earnings reports are also due to be released, giving investors something other than macro-economic headlines to consider.
Economic Calander
- Tuesday: JOLTS, Treasury Budget
- Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report, Beige Book
- Thursday: Jobless Claims, PPI-FD, Empire State Mfg. Survey, Philadelphia Fed Survey
- Friday: Consumer Price Index, Industrial Production, Consumer Sentiment, Treasury International Capital
