Wage Growth Finally Speeds Up

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Wages showed signs of life in January, up 0.3% over the month. At the same time, wage growth for December 2017 was revised from 0.3% to 0.4%. Average hourly earnings are now up 2.9% since last January – the fastest growth since June 2009 (Figure 1).

Figure 1: Fastest Wage Growth since 2009

Average Hourly Earnings vs. Median Wage Growth (2/08 – 1/18)

Source: Thomson Reuters Datastream, 12/8/17. Average hourly earnings is calculated by the BLS and represents the average wage of all private employees.

The U.S. economy added 200,000 jobs in January (as measured by nonfarm payrolls). The increase was slightly ahead of expectations and broad-based across industries. Job growth averaged 181,000 per month in 2017. The pace of hiring signals solid economic growth in the first quarter (Figure 2).

Figure 2: Businesses Continue to Hire

U.S. Employment; Nonfarm Payrolls, 1,000 Persons

Source: Thomson Reuters Datastream, as of 2/2/18. Nonfarm Payrolls include any job except for farm work, unincorporated self-employment, and employment by private households, the military, and intelligence agencies.

The unemployment rate remained steady at 4.1%, a 17-year low. This is below the level of unemployment which most economists consider consistent with stable inflation. As labor becomes more scarce, wage growth is now finally beginning to pick up.

Bottom Line

Faster wage growth will provide ammunition for the hawks within the Federal Open Market Committee (FOMC), and it increases the probability that the Fed will raise rates at the March meeting and beyond. As investors reconsider the likely path for Fed policy this year, bond yields have risen, and breakeven inflation has moved higher.1

1. Inflation expectations implied by the pricing of inflation-protected bonds.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group

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