Market Insights: U.S. wage growth heating up!

U.S. Wage Growth Heating Up!

We have highlighted many positives for the US market in our recent Market Insights posts, including surging manufacturing growth, cycle high levels of consumer confidence, an intensifying credit boom set to provide more fuel for equity buybacks and merger & acquisition activity, and all-time high levels of small business optimism, not to mention 50-year low levels of jobless claims resulting in a very strong employment situation and year-over-year retail sales growth hitting a 13-year high (source: Redbook).

Of note, we discussed the NFIB Small Business Optimism Index in our Second Quarter Wrap-up. At that time it was closing in on an all-time high, but just recently it did hit a new high for the 45-year, closely watched, survey. As we noted in the post, it has typically peaked out on average 41 months in advance of a recession, which is a strong lead time. It is unclear if this is the peak, but the strength shown is a very good sign for the US economy, and gives us further belief that the current secular bull market has plenty of room to run.

One hiccup over the last year or two has been wage growth, but we are now finally starting to see evidence of the long-awaited acceleration in the recently released August report (see chart below). Average hourly earnings grew 0.4% last month and now up 2.9% over the last year which is the fastest rate of growth since the economic recovery started in 2009. In addition, total wages, which also include the total number of hours worked, are now up 5.1% over the past year. This bodes well for increased consumer spending in the future. The details of this growth are also encouraging, with earnings for the bottom 10th percentile growing at more than three times the rate of those in the top 10th percentile, showing it isn't just the rich getting richer and that the recent tax cuts are indeed helping lower to middle class workers.

This all results in a very tight labor market. The current unemployment rate of 3.9% is projected to hit 3.5% next year. However, we would not be surprised if this level nudged down closer to 3% by the end of 2020, as the most recent JOLTS report shows that the number of job openings in the US has exceeded the number of unemployed individuals since March. This is an unusual occurrence that has not happened in over two decades. Also compounding hiring issues for companies is the fact the rate of job openings and job quits is increasing at a faster pace than company hires. The NFIB report and the JOLTS report are reflective of a tight labor market with the likely result of continued upward pressure on wage inflation.

Therefore, we believe the recent wage growth surge will likely continue. The problem will be balancing this against inflation, so we will see how the US Federal Reserve can navigate this by implementing interest rate hikes at the appropriate pace to keep things in balance.