A Labor Department report of rising U.S. wages last week fed market inflation fears and touched off a swoon still sweeping through global markets. But a deeper look at that report raises questions about whether wages and inflation really are rising in such threatening ways.
Average hourly earnings for all private-sector workers increased 2.9% in January from a year earlier, the best gain since June 2009, according to the Labor Department.
Stronger inflation could cause the Federal Reserve to act more aggressively to lift interest rates. That move would be intended to prevent the economy form overheating, but could have a depressing effect on stock prices.
But wage gains aren’t very widespread. A separate gauge in Friday’s report showed wages for nonsupervisory workers, who account for around 80% of employment, rose just 2.4% for the year ended January, in the same paltry range that’s prevailed for several years.
Almost all of the gain in Friday’s report came from the smaller subset supervisors and nonproduction workers, who saw wages rise 5% on the year. This measure is volatile. The monthly gain in wages for this group, which was 0.8% in January, carries with it a margin of error of 0.66%, notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“It would not surprise me in the least if this reverses in February,” he said.
This isn’t the first time the small subset of managerial workers has seen a big uptick in monthly pay. Wages for this group rose 1.2% last February and 1% last July, pushing overall wages up 0.3% in both months, a pace that wasn’t sustained in the following months.
Annual wage growth in the overall series reached 2.8% in July 2016 but didn’t maintain that pace of growth.
Other components of Friday’s report also make the banner wage gains less impressive. The average work week declined in January. As a result, the annual change in weekly wages for all workers rose 2.6% on the year, below gains of 3% in December and 3.1% in November.
A broader look at Americans’ after-tax incomes, including wages, dividends, bonuses and Social Security checks, shows an improving trend over the second half of last year. But the gains are less than the pace at other times in this expansion.
The question for the Fed is how quickly higher wages will translate into inflation. This will determine how quickly and for how long officials proceed with rate increases.
Most Fed officials haven’t shied away from their fundamental view, embodied by the so-called Phillips curve, that tighter labor markets will drive stronger wage growth and more inflation. But the linkage isn’t immediate or rapid, and some officials say skepticism is warranted.
“I caution against interpreting good news from labor markets as translating directly into higher inflation,” said St. Louis Fed President James Bullard in a speech in Lexington, Ky., on Tuesday. He said the relationship between inflation and labor market conditions “has broken down in recent years and may be zero.”
During the last two expansions, annual wage growth peaked at 4%. Why are investors now worried that as wage growth nears 3%, the Fed might lean on the brakes by raising interest rates faster?
One possibility is that officials expect worker productivity, which has been lower over the past decade, won’t pick up. If productivity rises, officials can tolerate higher wage gains because they won’t necessarily push consumer prices higher.
The prospect of higher inflation and higher rates weighs on stock valuations. But for now, markets aren’t sending signals that they see the economy slowing down. One piece of evidence is that market-based measures of inflation expectations haven’t declined.
“If the market expected the correction to trigger a recession, then inflation expectations would also have crashed yesterday,” said Torsten Slok, chief international economist at Deutsche Bank.
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from Real Time Economics http://ift.tt/2GQNrSp
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