Wage Growth - Is It Accelerating?

Wage Growth - In my last post I gave an overview of the August labor report. I’ll fill in the details with this article. ECRI has been negative on economic growth since late 2017.

There was some slowness in Q1, but that was reversed in Q2 as growth was 4.2%. It has been completely wrong to be negative on U.S. growth as America has outperformed other advanced economies.

This gives context to the ECRI chart below which shows average hourly earnings growth, aggregate payroll growth, and aggregate hours worked growth.

Even though this shows 3 stats in one chart with 3 different y axes, I don’t think this is a chart crime.

However, I disagree with the interpretation of the data. I always discuss how take home pay is important which is why I look at weekly earnings growth.

The analysis from ECRI agrees that take home pay is important, but claims growth is weak which is incorrect based on an objective look at the data.

This chart shows hourly earnings growth is quicker than hours worked growth which means pay growth is in the middle. It’s not as weak as the growth in total hours worked and not as strong as hourly earnings growth.

However, we shouldn’t act as if payroll growth is weak, just because it is slightly off the high made in June. The weekly earnings growth for August was 3.2% which was above July’s growth of 3%.

The cycle high is 3.4%, showing us how strong take home pay growth was. Regardless of whether the ECRI’s negative prediction for the economy is correct, I will continue to follow it to understand both sides of the debate.

Wage Growth - Multiple Job Holders

Heading into the jobs report I was wondering if it would have a bad headline which would be revised higher.

That’s because in the past 5 years the average initial report was 158,000. Yet the average positive revision of 38,000 brought the average to 196,000.

It’s still possible the report will be revised higher, but it started great which was different from the average.

The chart below shows the number of people working more than one job is at a cycle high.

You can either say the labor market is so full that people need to work multiple jobs to fill them. Or that pay is so little, people need to work multiple jobs to make ends meet.

I think the situation is more of the former because jobs are plentiful and people are secure in their jobs.

There are certainly some people working extra hours because of income inequality. But that’s probably a smaller part at this point in the cycle.

Since this is a volatile stat, it’s tough to draw too many conclusions from it. It’s worth reviewing since it hit a cycle high.

Wage Growth - Fewer Construction Workers

The chart below shows 3 stats about the residential construction labor market.

As you can see, the construction unemployment rate is the lowest since at least 2001. Construction workers are tough to come by which means they are also seeing higher wages.

The total residential specialty trade contractors and residential home builders is lower than the previous peak which makes sense because there isn’t a housing bubble.

There are actually too few houses being built in certain cities because of restrictions against building apartments.

Many construction workers have dropped out of the labor market or have taken up a new trade. That’s the only way there are less builders and tractors and a lower unemployment rate.

This is similar to the overall labor market as the unemployment rate is low, but there is still slack in the labor market because many potential workers are on the sidelines.

(Click on image to enlarge)

Wage Growth - Inflation Estimates Increase

Yields on treasuries increased because average hourly earnings growth accelerated. The month over month increase was 0.4% which beat estimates and last month’s report of 0.3%.

The 5 year yield increased 8 basis points to 2.82%. As you can see from the chart below, the 5 year breakeven inflation rate increased about 3.5 basis points.

This means slightly less than half the of the move in rates was related to inflation and the other part was related to increased growth estimates.

The curve didn’t flatten which means the report will inspire more rate hikes and it has delayed the potential recession.

That’s good news for the Fed because it means it can hike rates without an inversion in the near term.

The latest odds for at least 2 more rate hikes in 2018 is 79.1%. This August labor report sealed the deal for the December rate hike. It can be undone though if this report is revised down.

Wage Growth - Cause Of The Expansion

The last recession occurred because of the housing crisis. It was amplified by oil prices peaking at $147 per barrel.

This was a one-two punch to the consumer which was faced with a disaster.

Another point worth highlighting is that this expansion isn’t being catalyzed by low rates. Optimism about job security and wages along with the animal spirits brought about by capital appreciation from investments are spurring economic growth.

It’s important to highlight this because bears claim when interest rates rise, the expansion will implode. And there will be a terrible recession. I think rising rates signal improved growth. This is why I root for the 10 year yield to increase as long as inflation remains modest.

Wage Growth - Conclusion

Weekly earnings growth was one of the strongest parts of the August labor report.

Even though the labor market is stronger than ECRI suggests, I still follow its leading index because it has a great track record. The stronger the economy is in the second half, the more wrong its prediction for a slowdown will be.

I may have been wrong to suggest manufacturing weakened in August. We’ll need to see the hard data reports to determine the truth.

If it didn’t slow, there’s not much evidence of a second half slowdown.