Friday, December 08, 2006

Hooray! More jobs! Oh, wait...

Strong job growth signalled to the markets that the economy might not exactly be getting ready to melt down altogether, which was bad for bonds but not good for the stock market, either, and guess why?

If you've been reading this blog for any length of time, you should know that the reason good economic news is bad news for the part of the economy most people care about - mortgage rates and stock prices - is that all news is interpreted through the lens of the Fed and what the data will mean to the Fed governing board and their likelihood of raising rates.

Since the Fed is terrified of inflation and a tight labor market means (in theory - BAD theory, but theory nonetheless) rising wages, and rising wages mean rising labor costs and rising labor costs means rising expenditures for business and rising expenditures are always recouped through rising prices (THERE'S where the logic breaks down, for those playing along at home), rising employment means inflation. Q.E.D.
Note: Q.E.D. is a Latin term meaning "I am WAY smarter than you."
Oh, but what happens if rising labor costs are offset by productivity gains? Like, say, what if you could conduct all your international operations by using Skype for free rather than paying AT&T several million dollars a year? Or what if the cascade failure in the price of flash memory allowed your employees to do 10% more work in the same amount of time? Or hey, what if allowing people to act like humans meant that they gave you 15% more productivity for the same money - or even that they were willing to be paid less in exchange for not being incarcerated in cubicle farms?

In short, this is a great economic model for the six thousand years of recorded history before, say, 1870. This is the period during which not bloody much was invented. It starts to break down about then, and by now, folks, even people like me that never went to school in economics can tell you that unemployment, which hasn't been above 8% since before I could drive, is a really, really poor indicator of price pressure. Productivity gains are being amde all over creation in practically every industry without the necessity of raising wages. In fact, if you include outsourcing in the mix, what you get is wage decline.

Basically, as one analyst put it this week (and I put it several months ago), the question is - who is right, the Fed ("inflation is attacking like Space Invaders!") or the global bond market ("if the Fed would just quit running about like Chicken Little we could get some work done here")?

Here's a hint. It's the bond market.