Rising Wages and Rising Risks
An improvement in wages comes with a trade-off.
The U.S. labor market kicked-off the new year with better-than-expected results. Employers added 200,000 jobs in January, and the unemployment rate remained at a 17-year low of 4.1 percent. While employment growth was strong, the biggest story was the jump in wage growth, which grew 2.9 percent over the last 12-months. This is substantially better than the 2.6 percent growth workers saw for most of 2017, and the highest since June 2009. However, the jump in wage growth is not without trade-offs. With rising wages comes the risk of inflation, which could have a dampening effect on stock prices and force the Federal Reserve to raise interest rates faster than expected. This is an issue discussed in our recent Market Snapshot. January’s report also showed labor force participation remaining steady and 62.7 percent and underemployment rising by one-tenth of a percent to 8.2 percent.
Top Takeaways from the Report
Wage growth improves
Economists and officials at the Federal Reserve have been puzzled by the lack of wage growth given the strong pace of hiring and low unemployment rate. That time may be over. Wages in January grew at 2.9 percent over the last year, and December’s wage growth was revised up from 2.5 percent to 2.7 percent. This positive move likely means that the tight labor market is forcing employers to pay more for qualified workers. This is a trend worth watching, as rising wages could stoke inflation growth and lead the Fed to increase interest rates at a faster pace. Improvement in wage growth comes at a good time as consumers look to continue spending and savings rates are near all-time lows.
Hiring remains robust
The labor market added 200,000 jobs in January, more than the 175,000 that economists were predicting. This is marks the 88th straight month that the U.S. has seen job gains, and is a positive sign that employers see a robust economy. The unemployment rate stayed level at 4.1 percent in January, while the underemployment rate rose slightly from 8.1 percent to 8.2 percent. One area for concern, is that given the low unemployment rate and fast pace of hiring, more industries will begin to experience labor shortages. This could become particularly acute in industries like construction.
The new Fed Chair may have difficult decisions to make
Jerome Powell will take over the reigns as Fed Chairman on February 3rd, replacing Chairwoman Janet Yellen. Powell has historically shared similar policy views as Yellen, and will likely attempt to stay the course. However, his chairmanship comes at a difficult time, with the specter of inflation on the horizon and a policy path of rising interest rates. With wage growth improving and signs of inflation showing up in the economic data, Powell may need to raise rates faster than anticipated. This will be a difficult test earlier in his tenure, as raising rates could hurt stock valuations and make him politically unpopular.
Growth by Industry
The education and health services sector experienced the largest employment increase over the past month of 38,000. Health care made up 21,000 of those jobs.
Construction sector employment continued to improve as 36,000 jobs were added in January. This is 3,000 more jobs than were created in December, and the sixth straight month of job gains for the sector.
Employment in the leisure and hospitality industry rose 35,000 from December, with 31,000 of those jobs coming in food services and drinking places.
The manufacturing sector, which had a turnaround year in 2017, continued to add jobs, growing employment by 15,000 jobs in January.
The Bottom Line – The U.S. labor market remains on a steady track and looks to continue its growth into the foreseeable future. While economic growth remains strong, rising interest rates, labor shortages, and inflation growth may prove to be headwinds in 2018. With Jerome Powell set to take over the Fed chairmanship on February 3rd, it is clear that he is inheriting a more volatile economic situation than was the case in 2017. With three quarter-point interest rate increases anticipated for this year, it will be up to the Fed to decide how it wants to handle the potential threat of rapidly rising inflation. If wage growth continues to improve and inflation picks up, the Fed will be left to consider the trade-offs between adding more interest rate hikes and potentially harming the stock rally, or leaving the current rate path unchanged and risk runaway inflation. Neither choice is popular.
The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economic and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.
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