Thursday, September 07, 2006

THE SHORT VIEW By John Authers - What's going on?

THE SHORT VIEW By John Authers
Copyright The Financial Times Limited 2006
Published: September 7 2006 03:00 | Last updated: September 7 2006 03:00

Imagine an emerging market country which announced that GDP had grown 2.5 per cent in the first quarter and then, six months later, said it had in fact grown by 9 per cent. Although ostensibly good news, the revision would provoke alarm. The implication would be that the nation's policymakers did not have control over their own economy.

All those with a stake in the US economy had a similar experience yesterday, when the Bureau of Labor Statistics announced that unit labour costs rose 9 per cent year on year in the first quarter, not 2.5 per cent. The rise in second quarter unit labour costs was revised from 4.2 to 4.9 per cent.

Employment statistics are often messy and revisions have caused controversy in the past. The rightwing blogosphere still seethes with conspiracy theories about a revision in 1993, showing that unemployment had gone down, not up, in the previous year - too late to help President George H.W. Bush, who had lost the 1992 election to Bill Clinton because of "the economy, stupid".

But this was an unusually dramatic revision, which plainly changes the calculus facing the Federal Reserve. Those more worried by recession than inflation might be happier. All others would have preferred the numbers in their original version. Higher labour costs make it harder for the Fed to continue its pause in monetary tightening, let alone cut rates. As labour costs are a huge chunk of corporate expenses, the revision is also prima facie bad news for earnings.

Overall, the markets reacted accordingly, treating the development as negative, but the damage could have been worse. Yields on the benchmark 10-year Treasury bond rose 4 basis points, but this largely reflected a belated realisation that last week's rally was overdone. Stocks were down, after a good run. Fed Funds futures for next month were unchanged, although the implicit probability the market put on a rate rise later in the year did go up a bit. No great damage has been done by the BLS's under-estimate, then. But the incident is unsettling. The Fed says its rate decisions will be data-dependent. It would be nice, then, if the data were a little more dependable.


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