Wage Gains are Coming

The U.S. economy is experiencing “a particularly bright moment,” according to Federal Reserve Chairman Jerome Powell, which is why Fed officials increased interest rates by a quarter of a percentage point to a new range of 2 to 2.25 percent and are likely to hike one more time by the end of the year. The strength is likely to persist into next year. According to the central bank’s “dot plot,” which is intended to forecast future actions, there will be four rate hikes by the end of 2019.

With consumer, business and Fed confidence running high, most economists expect that wage gains will keep the economy humming. In August, wages were up by 2.9 percent from a year ago, the fastest pace in nine years. Still, worker pay has been slower than overall economic growth. And when accounting for inflation, the annual increase in wages was just 0.2 percent. Yes, employees have seen improvement in their benefits, but the growth of total compensation is a full percentage point lower than it was the last time the unemployment rate was at this level.

What gives? According to the Wall Street Journal’s recent survey of economists, “pay raises are being depressed by three powerful forces: sluggish productivity gains, an aging population and overseas competition—that could persist despite low unemployment.”

We will learn just how bright the labor market was in September, when the government releases its monthly report on October 5th. The consensus estimate expects that 190,000 jobs were created and the unemployment rate will edge down to 3.8 percent, which would match the 18-year low reached in May. (For those keeping track, the lowest rate seen over the past near-five decades was 3.7 percent (Dec 1969), amid the Vietnam War.) Wages are likely to rise by 3 percent from a year ago and could edge higher by the end of the year. That extra money should help consumers stay ahead of rising prices.

Trade and Jobs: How is the ongoing trade war with China and other parts of the world impacting the labor market? At first glance, by not much at all…but the strength of the U.S. dollar, which rises as the economy improves and the Fed raises rates, has already started to slow down the manufacturing sector. While there is likely to be a rebound in manufacturing employment in September, don’t be fooled into thinking that this is a result of trade policy; rather it is more likely a bounce back from recent losses.