Unit Labor Costs

One of the things that I do not have the luxury of is years and years of experience. My adult memory only remembers one recession along with a major market selloff during that time. Even 1995's mid-cycle slowdown is a bit out of my memory - I was in High School. So I am unable to simply recall what it was like back then and try to draw conclusions for today.

Sometimes, this is actually advantageous - one could argue that my decision making becomes much less biased and I am forced to look at data. When it comes to asking the right questions, though, that's where years and years of experience can help. So like practically everything else in life - it's a gray area or a double-edged sword, or insert your cliche here.

Today's headline from Marketwatch states: "Unit labor costs rise 6.6% in Q4, a worrisome signal". When I read this, I always ask about the conclusion part of the headline, "Who says it is a worrisome signal?" This is very important to me because much of the time the conclusion is drawn from data that is purely noise.

So I pulled up the historical Unit Labor Costs. Saying to myself, "Alright, Factset, give me the year-over-year Unit Labor Cost % change...and start at the first available data you have". Below is the chart.

Source: Factset, Ecowin database (click for larger image)

I've highlighted my thoughts. Essentially, not much can be determined from today's data point. While the cost is a bit higher than we had in the slowdowns in '85 and '95 (the only two slowdowns worth comparison), it could be possible that a) the data is revised lower and b) unit labor cost y/y % change moderates.

That being said, on an absolute basis, labor cost inflation is a bit higher than in '85 and '95, and could keep the fed from cutting. That would be bad for stocks.