Payroll Gains Are Slowly Boosting Wage Increases

U.S. nonfarm payrolls added 200,000 jobs in January, the third monthly gain at or above 200,000 in the last four months. Since the beginning of 2011, private payrolls have added an average of 200,000 per month, helping drive the unemployment rate down to 4.1 percent and helping boost wage growth to 2.9 percent, the highest rate since 2009 (see chart). Though the pace of acceleration in 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 200,000 gain in jobs, goods-producing industries added 57,000 employees in January, well above the average gain of 39,000 over the past year. Durable-goods manufacturing and construction led with additions of 18,000 and 36,000 jobs, respectively. For private service-producing industries, which typically account for the lion’s share of job creation, payrolls added 139,000 workers, led by a 35,000 increase in leisure and hospitality. Professional and business services added 23,000 while the health care and social-assistance industries added 26,000 jobs in January. Retail added 15,000 workers after a drop of 26,000 last month. The public sector added 4,000 employees.

The unemployment rate held steady in January, matching December’s 4.1 percent rate. That is the fourth month in a row at that level and lowest rate since December 2000. The labor force participation rate also held steady in January, at 62.7 percent. The participation rate has been relatively steady over the past two years after drifting higher from the cycle low of 62.3 percent in September 2015, but remains well below the 66.0 percent rate that prevailed from 2004 through mid-2008.

Average hourly earnings rose 0.3 percent in January, 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. However, some alternative measures such as the median-wage tracker from the Federal Reserve Bank of Atlanta suggest that wage gains may be higher for the core 25-to-54 age group, as much as 3.6 percent for the 12-month period through December 2017. The average length of the workweek decreased by 0.2 hours to 34.3 hours in January. 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 fell 0.1 percent in January but is up 4.3 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 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. Overall, the current economic expansion is maintaining solid momentum and the sources of growth are broadening. Though pressures on prices remain moderate, if wages gains continue to accelerate, the Federal Open Market Committee (FOMC) could be pushed to quicken its current slow pace of normalization – either faster interest rate increases or faster unwinding of securities holdings. At the moment, the likely reaction by the FOMC would be to implement four ¼-point rate increases in 2018 rather than the three that are presently expected. Such a change is likely to have a bigger impact on financial markets than on the economy. The 10-year Treasury note yield has already risen to 2.84 percent, the highest since early 2014, and stocks have sold off in reaction to rising 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 to become the second-longest on record. However, with more signs that certain areas of the economy may be hitting some constraints, Fed policy may be even more important. Likewise, the impacts from the tax bill may play a crucial role in an economy already growing at a solid pace and approaching some potential constraints.

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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.