Average Hourly Earnings Growth Accelerates to a Cycle High in August

By Robert Hughes

U.S. nonfarm payrolls added 201,000 jobs in August, above the consensus expectation of 191,000. However, the prior two months were revised downward by a combined 50,000, putting the July gain at 147,000 and the June increase at 208,000. Excluding the government sector, private payrolls added 204,000 in August following downwardly revised gains of 153,000 in July and 192,000 in June (see chart). Over the past year, the economy has added 2.33 million new jobs.

Despite the somewhat lower gains over the prior two months, ongoing job creation has helped drive the unemployment rate down to 3.9 percent (unchanged from July) and boost wage growth to 2.9 percent, the highest pace of the current economic cycle and the fastest since 2009 (see chart). Though wage growth has been slow by historical measures, the combination of increasing payrolls, accelerating wages, and a relatively long workweek has provided ample support for income growth, which in turn has helped support consumer confidence and consumer spending.

Within the 204,000 gain in private sector jobs, goods-producing industries added 26,000 employees in August, only about half of the average gain of 51,000 over the past year. Construction led with a gain of 23,000, about in line with the average gain of 25,000 over the past year, while mining and logging added 6,000, close to its average of 5,000 over the past year. Durable-goods manufacturing lost 4,000 jobs for the month while nondurable-goods manufacturing added just 1,000.

For private service-producing industries, which typically account for the lion’s share of job creation, payrolls rose 178,000 workers, led by a 53,000 increase in professional and business services. This category has led in job creation over the past year, adding 519,000 jobs. The health care and social-assistance industries together added 41,000 jobs in August while wholesale-trade industries added 22,000, transportation industries added 20,000, and leisure and hospitality added 17,000. Retail industries and information-related industries both lost 6,000 in August. Information-related industries have lost 30,000 jobs over the past year. The public sector shed 3,000 employees in August.

The unemployment rate was unchanged in August, holding at 3.9 percent. A drop of 469,000 in the labor force helped keep the unemployment rate steady and push the labor force participation rate down to 62.7 from 62.9 in July. The participation rate remains well below the 66.0 percent rate that prevailed from 2004 through mid-2008.

Average hourly earnings was the clear bright spot in an otherwise solid though unremarkable report, rising 0.4 percent in August, resulting in a 12-month gain of 2.9 percent (see chart again). Gains in average hourly earnings have been below gains in previous cycles but remain in a solid uptrend. The length of the average workweek held at 34.5 hours in August. Average weekly hours have been bouncing around between 34.3 and 34.6 hours since 2012.

Combining payrolls with hourly earnings and hours worked, the index of aggregate weekly payrolls rose 0.5 percent in August and is up 5.2 percent from a year ago. This aggregate measure has posted relatively steady year-over-year gains in the 3 to 5 percent range since 2010. In prior business cycles, this measure tended to be more cyclical, hitting growth rates in the 7 to 8 percent range but then collapsing. The slower and relatively steady gains in the current expansion may prove more beneficial as they may help sustain the economic expansion over a longer period compared to the faster, more cyclical gains of previous economic expansions.

Broad-based gains in the labor market are providing support for consumer confidence and consumer spending. The recently released revised estimate of second-quarter real gross domestic product shows a significant reacceleration in consumer spending from a very weak first quarter. Overall, the current economic expansion is maintaining solid momentum and the sources of growth are fairly broad.

Though upward pressures on prices remain, they are moderate enough that it is unlikely the Federal Open Market Committee will retreat from its path of normalization. At the moment, the likely action by the committee will be to implement a total of four quarter-point rate increases in 2018 (with two already implemented). The 10-year Treasury note yield has already risen to just under 3 percent from less than 1.5 percent in 2016. Rising short-term rates, solid growth, and moderate price pressures are likely to push longer-term rates even higher in coming quarters. Rising federal deficits may exacerbate the upward pressure on Treasury yields.

The preponderance of economic data suggests continued economic expansion over the coming months and quarters, and increases the probability that the current expansion will remain on track. However, the fallout from trade wars and the potential for higher long-term interest rates remain significant concerns.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.