With Janet Yellen at the helm of the Federal Reserve, the business writers in the mainstream media are most curious about whether or not she will change monetary policies or if it will be business as usual. As I have done before, I will take a look back at a few comments that she made back in December 2006, just before the wheels fell off the American economy, to get a sense of her priorities.
Here is one key comment:
"I have to admit that this time around I found it pretty challenging to read the tea leaves on economic activity. The data are providing distinctly contradictory signals. For example, several key indicators of aggregate spending have come in below expectations, and the Greenbook now sees real GDP growth this quarter and the next averaging a mere 11⁄2 percent. At the same time, the labor market continues to be strong and shows no clear signs of weakening, as evidenced by the November employment report. The latest information on inflation has been fairly favorable; but even with some signs of easing, the underlying trend in core consumer price inflation remains above my comfort zone." (my bold)
You will notice that she notes that the labor market in the U.S. continues to be strong and shows no clear sign of weakening. Just in case you've forgotten, here's what happened to the nation's unemployment rate after this meeting of the minds:
I yield the floor to Ms. Yellen:
"Overall, the data on spending paint a clear picture of an economy growing well below trend, but it seems as though the BEA hasn’t delivered this message to the BLS. [Laughter] The very latest data show payroll employment growing steadily. The household data are even more alarming. The unemployment rate has declined 1⁄2 percentage point over the past year and now stands at 41⁄2 percent, 1⁄2 percentage point below our estimate of the NAIRU. My business contacts tell me the same thing. Labor markets are tight, and jobs are hard to fill, especially for skilled positions. But some other indicators suggest that labor markets may have softened a bit. In particular, the Conference Board index of job market perceptions, based on a survey of households, declined in both October and November. This index is historically very highly correlated with the unemployment rate, but now it’s sending a different signal, suggesting that labor markets are roughly in balance. Similarly, in November fewer firms reported openings that are hard to fill." (my bold)
Again, Ms. Yellen comments on the strength of the U.S. jobs market, noting that the unemployment rate had fallen to 4.5 percent, a rate that we can only dream about now.
Why does Ms. Yellen have such a fixation with the unemployment rate? Here's the answer:
"On the one hand, recent labor market data point to a lower path for the unemployment rate than before, and all else being equal, this boosts our inflation forecast a bit. Offsetting this effect, on the other hand, is the huge downward revision in compensation per hour. When these data came out, I let out a big sigh of relief. The revised data are more consistent with the indications we were getting from the employment cost index and suggest that wage growth has remained contained. In contrast, my contacts report intensifying wage pressures, resulting in part from more-frequent employee quits and outside offers." (my bold)
That's right. Being a central banker, Ms. Yellen's priority is NOT employment, it is inflation. She was concerned that a rise in employee compensation (i.e. wage growth) could put upward pressure on inflation. When there was a downward revision in compensation per hour, she let out "a big sigh of relief".
Let's look at real (i.e. corrected for inflation) hourly employee compensation since 1947 with 2009 being assigned an index value of 100:
Notice how the rate flattens around the turn of the new millennium? Let's zoom in on that time period:
In 2000, real hourly compensation was 96.1. This rose to a peak of 99.8 in early 2007 but fell rapidly during the Great Recession to a low of 96.6. Real employee compensation hit a 13 year peak of 100.6 in the second half of 2012 but has since fallen to 99.2 in the third quarter of 2013.
If we look at all of the data since the beginning of 2000, we note that real hourly compensation over the 13 year period has risen by a paltry 3.2 percent, a much lower level than was seen during the second half of the 1990s and the period between 1947 and 1970. Basically, what we are seeing is a 13 year period where the real growth in employee compensation has completely stalled.
Just in case you wanted to see how employee hourly earnings have changed on an annual basis, here is another graph from FRED showing the percentage change in hourly earnings from the previous year going back to 1965:
As you can quickly see, since the early 1980s, annual raises (for lack of a better term) have rained from 1.4 percent to around 4 percent. These very low nominal compensation growth rates have led to real wage stagnation. Corporations will attribute this lack of wage growth to low inflation, however, at the same time as worker wages stagnated, CEO and named executive officer compensation has mushroomed.
From Ms. Yellen's comments in 2006, we can gain a sense of her top priority. She has shown us that she is far more concerned about the prospect of inflationary pressures in the economy than she is about growth (or, in this case, non-growth) in employee wages. I suspect that we will be getting more of the same now that she is Chairing the Federal Reserve.