No Clear Signs Of A Pickup In Wage Growth

Fed Comments

The unemployment rate, at 4.1 percent, had remained near the lowest level seen in the past 20 years. It was noted that other labor market indicators — such as the U-6 measure of unemployment or the share of involuntary part-time employment — had returned to their pre-recession levels. A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.

My Interpretation

I agree with the Fed on this issue. Financial markets experienced volatility after the January Jobs Report showed 2.9% wage growth – the fastest rate of growth since 2009. Investors interpreted this as a sign of inflation and financial markets sold off briefly. January’s wage growth was much higher than the 0.3% reported in December 2017. The question remains, “Is wage growth sustainable?” In my opinion, wages would gave to grow at 2.9% or higher for a few more months before it could prompt the Fed change course on rate hikes.

Secondly, despite a 4.1% unemployment rate signaling full-employment, there are still signs that suggest labor is weak. The civil labor participation rate – the section of the working population still employed or seeking employment – was 62.7% in January 2018. The figure touched 62.3% in September 2015; prior to that the labor participation rate had not been this low since the late 1970s when the country endured an economic malaise under President Jimmy Carter. Taken in totality hourly wage growth, the unemployment rate and the labor participation rate does not suggest clear signs of wage growth.

Conclusion

If the Fed remains data dependent then there may not be a need to hike rates at all this year. However, 10-year treasury rates could rise as the Fed unwinds its balance sheet. A 10 year-year yield of 3.5% or higher could cause more volatility for the Dow Jones (DIA) and S&P 500 (SPY). Investors should avoid stocks until the dust settles hopefully in the second half of the year.

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