U.S. Job Market's Solid 2018 Start Raises Wage-Pickup Hopes
The U.S. labor market began 2018 on a strong note as Americans saw wage gains accelerate amid better-than-expected hiring, raising hopes that a long-overdue pickup in worker pay is finally in train.
Nonfarm payrolls rose 200,000 in January, exceeding the median estimate of economists for a 180,000 increase, Labor Department data showed Friday, as the jobless rate held at a near 17-year low of 4.1 percent. Average hourly earnings rose 2.9 percent from a year earlier, the most since June 2009.
Stocks plunged by the most since 2016, as the data reinforced the Federal Reserve’s outlook for three interest-rate hikes this year under incoming Chairman Jerome Powell, and indicated that a fourth may be possible. The outlook for rate increases was already relatively firm, with businesses bullish amid strong demand, and further optimism on the heels of the tax cuts likely to underpin hiring and investment throughout the year.
While caveats on the figures included a shorter workweek -- which may have influenced earnings -- and a possible boost from minimum-wage hikes, the first major economic data of 2018 showed broad-based strength in hiring that will continue to support consumer spending, the biggest part of the economy. Coming months will show whether the pay gains represent a sustained improvement that’s more in sync with a tight job market and employers’ complaints of a shortage of skilled workers.
The year “is getting off to a good start,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., who correctly projected the payrolls gain. “The thing that’s catching everyone’s attention is strength in wages. It looks like the tightening in the labor market is finally gaining some traction with compensation growth.”
The Labor Department’s figures included its annual benchmark update to the establishment survey, spanning payrolls, hours and earnings over the past five years.
Average hourly earnings rose 0.3 percent from the prior month following an upwardly revised 0.4 percent gain, the report showed. The advance from a year earlier -- which partly reflected a downward revision to the January 2017 wage figure -- compared with projections for a 2.6 percent increase. December’s gain was revised upward to 2.7 percent.
Given the extent of revisions to past data, it may take some more time to determine whether wages -- which have been the soft spot of an otherwise strong job market -- are undergoing a more durable acceleration. During most of this expansion, businesses across the economy have largely resisted giving out more generous paychecks even as labor-market slack continued to diminish.
What Our Economists Say
The above-consensus payroll print and increase in average hourly earnings was partly tempered by a drop in the length of the workweek, which thereby weighs on aggregate income creation. However, elevated absences and curtailments due to inclement weather may have impacted the workweek, so the dip is likely to be temporary -- and hence less troubling that what would otherwise be the case.
The labor market is on solid footing, potentially accelerating, and on track to drive the unemployment rate lower in the near term. Lower unemployment and mounting wage pressures will test the Fed’s conviction to maintain its scheduled trajectory for rate increases in 2018 -- particularly if the dollar continues to depreciate at a rapid pace.
-- Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics
Read more for the full note from Bloomberg Economics.
Also, 18 states began the new year with higher minimum wages, and some companies have recently announced bonuses and salary increases following the passage of the tax-cut legislation signed by President Donald Trump in December. While determining the exact impact may be difficult, economists expect these developments will boost worker pay in 2018.
One weak spot in the January report was the average workweek for all private employees, which unexpectedly decreased to 34.3 hours from 34.5 hours.
The details of the wage data showed more money going to supervisory workers, whose pay might not have been as affected by hours worked. Production workers’ wages rose 0.1 percent from the prior month and were up 2.4 percent from a year earlier.
Bloomberg’s Michael McKee reports on the U.S. employment data.
More broadly, the unemployment rate and wage growth -- two parts of the report most closely tied to the Fed’s goals of maximum employment and stable inflation -- show the labor market is proceeding along the lines that central bank officials would want to see.
“Even if unemployment were to stop here, I think its already low enough to put sustained upward pressure on wage gains,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. “But at the same time, there’s just absolutely no sign of slowing in employment growth and this pace in employment growth is more than strong enough to keep unemployment falling.”
Faster wage growth also has the potential to feed into price gains. Fed policy makers this week left borrowing costs unchanged while adding emphasis to their plan for more hikes at a gradual pace. They also said inflation is expected to move up this year and to stabilize around their goal.
A separate report Friday showed consumer sentiment exceeded analyst estimates in January as the outlook for jobs and household income improved, according to University of Michigan survey data.