Westpac: US wage inflation contained

Via Westpac:

Nonfarm payrolls rebounded strongly in October following a disappointing September print – a consequence of Hurricane Florence’s disruption. October’s 250k gain leaves the three-month average at 218k, in line with the month-average for 2018, but ahead of 2017’s 182k.

The unemployment rate was unchanged at 3.7% – a near 50-year low – as the above strength in employment offset a rise in participation to near the top of the range of the past five years.

Further highlighting the continued erosion of remaining slack in the labour market, underemployment (represented by the U6 measure) edged 0.1ppts lower to 7.4% to be just 0.6ppts off its all-time low of October 2000.

The labour market is therefore unquestionably strong, and a further acceleration in wage inflation only a matter of time. But will this uptrend warrant concern over inflation?

Arguably the base expectation of the FOMC, and indeed Westpac, is that this wage acceleration will be modest both in pace and scale, as has been the case to date, allowing the economy to gain additional strength and wealth without policy having to react.

From the monthly establishment survey, growth in hourly earnings for private sector employees has now doubled from the low of 1.5%yr (3.1%yr currently), but this improvement has taken six years. Recent momentum has been a little stronger, with the sixmonth annualised pace at 3.3%. However, that is still subdued compared to the 4.1% prior peak, seen in August 2008.

With the September quarter Employment Cost Index (ECI) also just released, this month we have a second income benchmark to consider.

On a like-for-like basis (private-sector wages), the annual nominal rate of gain for the ECI is consistent with hourly earnings at 3.0%yr. If we include state & local government workers in the calculation, then earnings growth is a touch weaker at 2.9%yr – more so if we also include non-wage benefits, with annual compensation growth (wages and benefits) at 2.8%yr.

This is not to discredit the momentum of hourly earnings and the private wages component of the ECI. Rather it is to highlight that the forces driving income growth are complex and that gains for one industry or pay type are not necessarily repeated elsewhere.

For the forward view, another wage gauge is worthy of note: the Atlanta Fed wage tracker which tracks the wage gains of matched individuals over a year. In contrast to the 3.1%yr rise in hourly earnings reported above, the three-month average median wage tracker currently sits at 3.5%yr.

While this measure suggests there is greater underlying momentum in wages for those who remain employed, importantly this growth rate has been little changed for three years and is also well below prior peaks.

Consequently, albeit currently stronger, it fits with the above results from aggregate hourly earnings and the ECI and points to wage inflation remaining contained over the coming year, limiting the upside for activity and inflation.

All told, while there is reason to expect a further acceleration in wage inflation, it is unlikely to be sudden or large enough to warrant more aggressive action by the FOMC. We remain of the view that the FOMC will raise the federal funds rate three more times to 2.875% at June 2019.

Still looks like wages Goldilocks to me.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. When you have a huge illegal / undocumented workforce in the country it is little wonder there is no great wage inflation with official unemployment at 3.7%. Not rocket science.

  2. US wages aren’t really rising much for a majority of individuals – more people are gaining employment as the government continues to stimulate the US economy. That a significant part of that growth appears to be a ramp-up in military spending is a little unsettling when it’s Trump who is at the helm – but spending is spending nonetheless and whether it’s hospitals to heal the sick or missiles to blow people up it all flows on.