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Wages stagnate, but job pick-up to keep mkt fine: Leahey

M Cary Leahey, Senior Advisor at Decision Economics says the lower than expected jobs data should not impact market much because there is no drop in the effective work week. He says the fed will be pleased with payroll gains a decline in long term unemployment than a pickup in wages.

Below is the transcript of M Cary Leahey’s interview with CNBC-TV18’s Surabhi Upadhyay.

Q: What is your sense of the numbers that we have seen where the actual addition of jobs has been a little lower than most of the consensus forecasts?

A: I don’t think people are making much of that. The fact that the number continues to print 200,000 or better which is very welcome and in particular if you look a little deeper into the details and see that there is no drop in the effective work week. You got a very solid increase in total hours worked in the economy. So, you have a shot at 4 percent Gross Domestic Product (GDP) growth rate.

So I would argue that the details from the report are actually stronger than the headline. I don’t think the market makes much of the fact that it fell short of expectations.

Q: That was really interesting. So if that is the opinion that you hold then what will that mean for the dollar which of course cooled off a little initially as the market interpreted this to be not a very super strong report. What will it mean for the dollar and what will it mean for the timeline in terms of Fed finally moving on rates?

A: First, when the dollar is positive, dollar traders are probably saying yeah! what the economists are telling me is true. But if the export momentum unravels you might not make 4 percent this quarter and that is probably what they are thinking. It is certainly dollar positive because the Fed will still continue to have the consensus view or the so-called median voter at the Fed will continue to say you are not going to have a big follow through on the economy till wages pick up and consumer spending picks up. Both are mild at around 2 percent, very subpar growth rate.

So until you see the whites in the eyes of wages, I don’t think the Fed is going to move. But clearly if you thought they were moving in September, they could move in June. I don’t think you can move any sooner than June but there are going to be people who are going to be whispering over the weekend, trust me they are going to get March, but I don’t see that and if it does it is going to be great because that means the economy is going to be ripping along and wages are going to be picking up and Yellen’s going to be very happy with labour market on all cylinders. I don’t think we are going to get there but it would be nice if it happens.

Q: We have not got any specific targets from the Fed chair on when they will start looking at rates or policy after what kind of cut off level on that unemployment number. What is your best sense, what can we expect from this jobs report over the next couple of months and what sort of number might start looking very pleasing to the Federal Reserve?

A: They could be very happy with no improvement in the unemployment rate from here; if it stayed where it is for the next six months that would be relatively unimportant. It would be payroll gains of at least 175 and perhaps more than a pickup in wages and also a decline in long term unemployment.

One thing the Fed won’t tell you is that the vertical history is that if you want to get middle class incomes to really start moving up you have got to get the economy really ripping along and we haven’t got near yet. So in some sense the Fed says we have to get gains in payrolls of 200,000 for at least a year before the average American will benefit from that and you are clearly a long way from that. But it is going to be the wage numbers what is really going to count.

Q: What is your sense on how wages are moving? Are you expecting any kind of strength to pick up as we enter the New Year?

A: I am going to get a little technical. If you look at the 80 percent of the index we talked about earlier today which is the manufacturing component of that index that is showing some life and if you tie it to small business wage expectations I wouldn’t be surprised if 18 months wage gains will be closer to 3 percent than 2 percent. If you get that that is going to be great news for the economy but perhaps bad news for stocks because it means some erosion in margins.


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