COMMERCE BANK ECONOMIC REVIEW - January 2007

“We started off the year with some upbeat economic news!”

By Joel L. Naroff, Ph.D.

We ended 2006 on a note of uncertainty, but 2007 has opened up with a number of positive events. The faltering job market suddenly seems less worrisome than it had been and cracks seem to be developing in the energy front. As for the Fed, well you never know – which seems to be their problem as well. Of course, there still is the housing market to contend with and the vehicle makers seem to have added additional gears to reverse, but let’s at least start off with some hopeful news.

If the economy is to keep from falling into a major funk (that’s a technical economic term), businesses are going to have to play their role as income generators. They do that by creating jobs and, guess what? That is precisely what happened in December. Firms added 167,000 new workers and the level was totally unexpected. In addition, the November increase was revised upward. 

The usual strong sectors were just that. Health care, finance and temporary help services all brought on new employees like crazy. The airlines apparently decided that it was bad form to have lousy service during the peak season and loaded up with workers. The government helped out as well. Of course, we did have layoffs in the weakest links – construction and manufacturing – and retailers were extremely conservative. Regardless, the payroll increase was impressive. 

Jobs were not the only story. Most importantly, wages soared. The average hourly wage was up 4.2% from December 2005, the largest rise in six years. The unemployment rate remained at a tight 4.5%, which explains the need to pay up for all the workers firms are looking for. And with hours worked rising, the outlook for income growth is quite good. 

Indeed, households have continued to spend all the money they have and more. November outlays were quite strong, but the savings rate was negative once again. I guess there is no simple way to look at these numbers. The consumer has to keep up the pace to keep the economy from faltering. But eventually, we really need to start rebuilding our dwindling savings for the good of our personal finances and the nation. 

The employment report was as good as it gets but, as we all know, no good economic news goes unpunished. The pressures on wages are not going away anytime soon. That has to be of concern to the Federal Reserve and pushes back any possible rate cut.
There was some positive inflation news: petroleum prices plummeted. The incredibly warm winter in the East has the cherry blossoms blooming and OPEC fuming. Eventually, we might even see lower prices at the pump. That should somewhat ease the inflation fears that have been affecting thinking at the Fed.

As for the markets, investors had a wake up call. Rising labor compensation may help power consumer spending during the early part of this year, but it is not good for earnings estimates or inflation projections. The labor market ended 2006 on a strong note, which is nice for workers. But it was not necessarily something to smile about if you are an investor worrying that the Fed will not lower rates anytime soon. Still, I’ll take it.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with more than 425 convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Southeast Florida. Commerce Bancorp (NYSE: CBH) is headquartered in Cherry Hill, NJ and has more than $43 billion in assets. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.