Good Report, Highlight is Wage Growth

Wage gains have turned the corner and are likely to continue rising, contributing to both higher labor income and consumer spending. As for price inflation, the implications are less clear, but the pace of wage gains leaves at least some upward bias. 

While the headline figure, the payroll gain for December, came in below expectations, it was nevertheless a  strong number—well above the threshold level needed to absorb new entrants to the job market, despite the unemployment rate being below the NAIRU. Plus, upward revisions to the previous month’s offset the slight miss in December. Could you say such a pace of job gains is too good at this stage of the cycle? Interesting question. We will just call it good. In any case, we tend to look through anyone’s monthly data point, instead preferring to focus more on average gains over the last six or 12 months. These are down marginally, but still a heady 189K and 180K, respectively. 

The unemployment rate ticked up a tenth to 4.7%, which was widely expected after the two-tenths decline in November (initially reported as a three-tenths decline). The participation rate ticked up a tenth after declining two-tenths in November but is unchanged from a year ago. The unemployment rate is effectively at the NAIRU. Moreover, the broader U-6 measure of the unemployment rate ticked down a tenth to 9.2% and has now declined five-tenths since September 2016. As I noted in my commentary on the minutes, the  Committee seems most focused on the unemployment rate in terms of the timing of the next rate hike [link to our Minutes commentary]. That is, a renewed decline in the unemployment rate, or at least a faster decline than expected, could be the catalyst for the next move. We are still at two moves in 2017, in June and December. But two versus three hikes is a close call, and if fiscal stimulus finds its way into 2017, we would be at three. 

But the star of this report was average hourly earnings, which rose 0.4% in December, slightly above consensus expectations. Again, this is just a single data point. But the six- and 12-month rates are now 3.0  and 2.9%, respectively. For the 12-month rate, that is the highest figure since May 2009. Over the last couple of years, there has been a clear upturn in average hourly earnings, from a 12-month rate of only 1.7%  in 2014. Of course, most of the upturn came in 2015, when the 12-month rate was already 2.6%, close to  2.7%. We see a risk that average wage growth, as measured by the ECI, will rise faster in 2017 than the  2.8% in our most recent forecast. (For an interesting discussion of wage and inflation dynamics, see Senior  Adviser Alan Krueger’s commentary, to be posted Monday.)

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