by US wage growth has remained puzzlingly weak lately, possibly held back by structural factors.Perennially slow wage growth partly explains why the Federal Reserve’s monetary tightening has been so slow despite the strong US labour market and core inflation that is now at or about the Fed’s target of 2%. Hence the close market attention to wage growth, which could influence Fed policy considerably. Recent wage data has remained tame, with average hourly earnings in July growing an uninspiring 2.7% y-o-y —suggesting that very gradual rate tightening is set to continue (the next Fed rate hikes should be in September and December).Recent state-level data contains sobering news about potential future wage gains in the US as a whole. Particularly intriguing was news that wage growth, as measured
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US wage growth has remained puzzlingly weak lately, possibly held back by structural factors.
Perennially slow wage growth partly explains why the Federal Reserve’s monetary tightening has been so slow despite the strong US labour market and core inflation that is now at or about the Fed’s target of 2%. Hence the close market attention to wage growth, which could influence Fed policy considerably. Recent wage data has remained tame, with average hourly earnings in July growing an uninspiring 2.7% y-o-y —suggesting that very gradual rate tightening is set to continue (the next Fed rate hikes should be in September and December).
Recent state-level data contains sobering news about potential future wage gains in the US as a whole. Particularly intriguing was news that wage growth, as measured by average hourly earnings, rose only 2.2% y-o-y in California in July and only 1.9% in Texas. This is particularly puzzling since the economies of both states are flourishing, even booming, and are perhaps the two key growth engines for the US as a whole at the moment. GDP grew 3.5% y-o-y in California in Q1 2018 (latest data available) and 4.2% in Texas, outperforming the US average of 2.6%. But the unemployment rates in both states (4.2% in California and 4.0% in Texas) remain near the national average of 3.9%.
Tepid wage growth is a double-edged sword. On the one hand, it could start to undermine the sustainability of consumer spending (one mitigant though is that the US consumer still has access to abundant consumer credit). On the other hand, slow wage growth is good news for the durability of the current economic expansion, since intensifying wage pressures, by eating into company margins, have tended to herald recessions in the past.
