Multiple Ways To Review Wage Growth

The stock market sold off on Friday after the monthly labor report came out, but the results didn’t justify the decline. Some parts of the report were disappointing, and others were encouraging. Investor sentiment was negative, so any news was viewed as bad news. Private sector job growth was 161,000 which missed estimates by 22,000. That’s better than the headline number which missed estimates by 35,000 partially because of 6,000 declines in government jobs.

Wage growth was a mixed bag. On a month over month basis, average hourly wage growth was 0.2% which was up from 0.1% growth but missed estimates for 0.3% growth. On a year over year basis, growth was flat at 3.1% which missed estimates for 3.2% growth. On the positive side, this was the first back to back year over year growth of at least 3% since April 2009. On the negative side, hours worked missed last month’s report and the consensus of 34.5 hours, coming in at 34.4 hours. Weekly pay is all that matters. Working less and getting paid more per hour doesn’t drive retail spending. As you can see from the chart below, this scenario caused average weekly wage growth to fall from 3.4% to 2.8%.

(Click on image to enlarge)

Weekly Earnings Growth

Source: FRED

The 3.4% growth was the highest since October 2010. This recent decline puts growth at the lowest rate since October 2017. One big reason for this weakness is the tough comparison as growth in November 2017 increased from 2.3% to 3.1%. The 2-year stacked growth was 5.68% in October and 5.82% in November, meaning November was stronger. The trouble is other strong growth numbers will be lapped soon. It’s not ideal to have decelerating wage growth even if it’s because of strong comparisons.

This decline in weekly wage growth supports the notion that the Fed shouldn’t be hawkish. However, wage growth hasn’t driven up core inflation anyway. Wage growth at this point in the cycle is the most important for workers because most workers are employed. While inflation declines are always nice, real wage growth during recessions doesn’t help all the workers who have been laid off.

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