Reuters has done a state-by-state analysis of wage data in the United States. And they have found that average pay rose by over 3% in more than half of US states. This finding is in line with other data, showing rising wages in the US and puts more pressure on the Federal Reserve to raise interest rates.
In early January, we saw that wages in the tightest urban job markets were increasing at a 4% pace, well above the nationwide average. One possibility that these data hinted at was that wages would start to rise more rapidly elsewhere in the United States as those labor markets tightened. Then, just Friday, data from the jobs report showed wages more generally rising at the fastest pace in 8 1/2 years. And both bond and equity markets sold off afterward, with investors apparently concerned that the data would precipitate more rate hikes than currently priced in.
One would think that signs of wage growth would be welcomed by markets since increased wages underpin sustainable increases in consumption. Moreover, the recent rise in average hourly earnings trails the 1990s and the 2000s. However, the Fed is known to be operating under the assumption that — at some point — wage growth presages inflationary pressures throughout the wider economy. And many economist further believe that it is difficult to contain these pressures through monetary policy once these pressures become engrained. Understanding this view within the Fed, markets are re-calibrating expectations about future monetary tightening and have sold off.
The Reuters data should add to market concerns. The news agency says specifically:
The Reuters analysis of the most recent data available found that in half of the 50 states, average hourly pay rose by more than 3 percent last year. That’s up from 17 states in 2016, 12 in 2015, and 3 in 2014. Average weekly pay rose in 30 states, also up sharply from prior years, the analysis showed.
Unemployment rates are near or at record lows in 17 states, including New York, up from just five in 2016, the Reuters analysis shows.
Echoing the sentiment that is causing markets to fall, Reuters then goes on to quote Bart Hobijn, an economics professor at Arizona State University: “Wage growth tends to accelerate when the unemployment rate gets really strong.”
Bottom line: Since December, I have been saying the Fed has been and will continue to be more hawkish than anticipated. With Jerome Powell now at the helm of the Federal Reserve, the tone regarding Fed forward guidance could change. However, Powell has made no indications he will deviate from the Fed’s previous script. And this means the Fed is likely to continue to guide toward three rate hikes in 2018, with a fourth possible if any of wages, inflation or growth surprise positively.