There has been a very positive development in the labor market. We saw the fastest rate of year over year wage growth since the recession. It is a wonderful sign for the economy because it means the slack in the labor market is finally evening out. However, there has been a trend towards overly optimistic presentations of the data.
Which Wage Growth Should We Use?
Do we want to use metrics like average wages? Do we want to include all jobs? If we include all of the jobs and simply average the gains, then a slight bump in executive pay can offset wage declines for hundreds. I would prefer to have excellent data pulled on the median along with the 1st and 3rd quartiles (so 25%, 50%, and 75% lines).
Here is an alternative set of numbers, which was also provided in the major economic reports. These numbers didn't get the headlines:
This chart tracks the wages for people who are working in "Production and Nonsupervisory" roles. In other words, these jobs on average are going to pay less. Some of these jobs are actually going to be very good jobs, but a large chunk of them are low-wage jobs. Those low-wage jobs may or may not be "low-skill" jobs. Due to high turnover, many of the low-wage jobs will also remain low-skill jobs because there is little time to build skills and little incentive for the business to invest in developing their employees.
The next issue is that the gains in weekly wages were lower than the gains in hourly wages which means the ratio of hours per week must be going down. That is the only difference in the math. One set of data divides wages by hours and the other by weeks. When hourly wages rise faster than weekly wages, we know the hours per week must be down.
That impact is most pronounced in the construction sector. That makes sense as well given that Treasury yields went soaring higher and brought mortgage rates up with them. Since buyers won't be able to leverage into the same value of house relative to income (due to interest payments), it makes sense that the construction industry would be looking at cooling things down a bit. Their hourly wages were still up to remain competitive, but it is easier to adjust hours down slightly than to encourage workers to accept a cut in their pay per hour.
When it comes to being near "full employment" and having wage growth drive inflation higher, we need to consider the amount of money people are actually bringing home. Ideally, we would also look at how much of that money was going to be spent on consumption in the immediate future. One way to emphasize that in the data set is to look at the wage growth in the jobs that will generally be lower wage positions. By looking at the production and nonsupervisory data we get a better feel for how wages are growing among people most likely to immediately stimulate the economy (that means buying a new television, phone, clothes, etc.)
If we only have wage growth at the top of the food chain, we only have more demand for the assets those people want. So far, that is precisely what we are seeing in the stock market. Demand for shares of stock was rising dramatically, but shares of stock don't go into the CPI (consumer price index). To see inflation pickup, we need to see demand for consumables increase.
It seems very unlikely that the Federal Reserve will proactively take these concerns to heart. It seems more likely that they would look to increase interest rates in the near term on the prospect that inflation might be increasing soon because wages were up 2.9% in nominal terms. You know what they say about 2.9%? They say:
"It sure sounds much better than the 1.93% for those lower paying jobs."
Sure, the 1.93% growth in wages combined with employment that is legitimately higher (not full, not very close to full, but legitimately higher than several months ago) should lead to more inflation pressure. It just won't lead to as much as an economist looking at 2.9% would project.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.