FIRST QUARTILE ECONOMICS |
The November employment data were exceptionally strong with a payroll gain of 404,000 jobs (or an annualized gain of about 3.9 percent). Unemployment fell to 4.6 percent from 4.7 percent and is at a 23 year low. November hourly earnings rose by 0.6 percent for a yr/yr trend of 4.3 percent and the wage pressure bogey man just won’t lighten up.
It is a bit of consolation that retail and wholesale trade job growth was extra strong, apparently in anticipation of the Christmas selling season and on balance, employment growth over the last twelve months is 2.5 percent, a shade above the long run average. On the wage front, the 4.3 percent yr/yr increase matches the rate set early in 1997. By my reckoning this should be viewed in terms of how little further wage gains have advanced through most of 1997. Indeed, every time the Employment cost index is reported we are reminded that total compensation growth remains virtually trendless.
We should all continue to focus on the direction of inflation in the U.S. and remember that the trend is still improving. Almost every day another forecast for U.S. GDP growth appears to be reduced along with expectations of CPI inflation in 1998. This remains an ultra favourable environment for long term U.S. interest rates which I will reiterate, are headed at least 50 basis points lower in the first several months of 1998.
Equities appear to represent a ghost that refuses to call it a night. Sure there is a lot of money out there that “has to go somewhere” and corrections to most equity types have to be bought but the party is at that stage where the next drink you take is the one you pass out from. Yes there are always going to be stocks out there to make money on but the opportunities are getting thinner.
Canada got some good news on the employment front in November as employment grew by 33,500 after two months of zero net growth. To some, this represented a resumption of the employment boom that prevailed during most of 1997. Maybe so but the Canadian economy is not likely to maintain the 4 percent plus growth pace much longer. We’ll get the Q3 GDP report on December 12, and it should indicate GDP growth of 4 to 5 percent following the 4.9 percent pace in Q2. That should be as strong as the economy gets as the lack of real income gains of the past year will soon drag the Canadian consumer back to a more sober spending pattern.
Right now the C$ is pretty quiet but remains in the U.S. 1.42 area. Don’t look for any Bank of Canada moves to push the currency higher with higher interest rates. However, if the C$ fades further amidst a semblance of volatility, the Bank will probably raise rates and get it over with.
For the next several weeks, i.e. through year-end, portfolio managers are inclined to preserve the returns they have achieved and are reluctant to ponder dramatic shifts in portfolio structure. This often leads to some erratic market swings that rarely follow through into the new year.
Friday, December 5, 1997.
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