Orlando's Outlook: Wage growth begins to accelerate


Bottom line This morning the Department of Labor reported faster-than-expected job gains in January, an upward revision to disappointing December results and the strongest year-over-year (y/y) increase in wages in nine years. Absent any weather-related hiccups in February, the across-the-board strength in today’s labor-market report should provide incoming Federal Reserve Chairman Jerome Powell with sufficient justification to orchestrate a quarter-point interest-rate hike at his first policy-setting meeting on March 21, with perhaps two more to follow over the course of 2018.

Better-than-expected nonfarm payroll gains The Bureau of Labor Statistics (BLS) reported that the country added 200,000 jobs in January, above the Bloomberg consensus of 180,000 jobs but below our own estimate of 217,000 here at Federated. However, the BLS revised December higher by 12,000 jobs to 160,000, which puts our forecast right in line with the two-month net change. Elevated November results were revised lower by 36,000 jobs to a final gain of 216,000 jobs

ADP and claims spark the resurgence Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Jan. 13 rose by a downwardly revised 216,000 jobs, which marks a new 45-year cycle low and points to continued strength in the labor market. Moreover, Wednesday’s ADP report for January added 234,000 private jobs, which was much stronger than the consensus expectation for a gain of only 185,000. Collectively, the strength in both ADP and claims suggested that today’s nonfarm payrolls would be stronger than expected, with an upward revision for December likely.

Wages soar, but hours worked fall Average hourly earnings rose for the fourth consecutive month by a stronger-than-expected 0.3% on a month-over-month (m/m) basis, compared with an upwardly revised 0.4% in December. That pushes the y/y gain up to a robust 2.9%—the strongest level since June 2009, just as the Great Recession was ending. That compares with an upwardly revised 2.7% y/y gain in December, which demonstrates that the tight labor market is beginning to spark an acceleration in wage pressure. We continue to believe it will approach 4% over the next year or so.

Eighteen states began 2018 with higher minimum wages. Moreover, in the immediate aftermath of President Trump’s tax cut, signed into law in late December, many companies have announced bonuses and salary increases.

But in what was clearly the most disappointing aspect of today’s labor-market report, the average private work week for all employees fell to 34.3 hours, down from 34.5 hours worked in December and November. Each change of 0.1 hour worked theoretically subtracts 350,000 jobs from the economy.

Unemployment and participation rates unchanged, labor-impairment rate rises The official unemployment rate (U-3) was unchanged for the fourth consecutive month at 4.1% in January, matching a 17-year low. Similarly, the labor-force participation rate (the share of working-age people in the labor force) was unchanged in January for the fourth consecutive month at 62.7%. While that’s down from a three-year high of 63.1% in September 2017, it remains close to its 38-year cycle low of 62.4% in October 2014. Finally, the labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—rose a tick for the second-consecutive month to 8.2% in January, due to an increase in people working part-time for economic reasons.

Household survey soars The admittedly volatile household survey rose for the third consecutive month, adding 409,000 jobs in January, after modest gains of 104,000 and 71,000, respectively, in December and November. In sharp contrast, the household survey lost 478,000 jobs in October. This leading indicator for nonfarm and private payrolls serves as the basis for the unemployment rate.

Construction remains strong Construction added 36,000 jobs in January due to the resurgence in housing, although manufacturing was weaker than expected, with a gain of 15,000 jobs.

Retail rebounds Last month, it added 15,000 jobs in January, after shedding 26,000 jobs in December. Transportation & warehousing, a new category associated with e-commerce, added another 11,000 jobs in January.

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