Cycle-High Wage Growth Still Manageable

September’s jobs report (released today) showed nonfarm payrolls grew 134,000 last month, while the unemployment rate fell to a 48-year low. Although the September headline jobs number missed consensus forecasts by about 50,000 jobs (partly Hurricane Florence related), upward revisions to the prior two months totaling 87,000 more than offset the miss. However, given the latest move higher in interest rates, investors are focused more on average hourly earnings to gauge whether wage pressures in the U.S. economy will force the Federal Reserve (Fed) to quicken its pace of monetary policy tightening.

Average hourly earnings grew 2.8% year-over-year last month, in line with forecasts and down from 2.9% in August, though at the high end of the range for this economic cycle. Here, we prefer to look at wage growth with some historical context. As shown in the LPL Chart of the Day, labor costs are significantly below where they were in the previous tightening cycle, leading us to believe that inflationary pressures have an ample cushion before they reach alarming levels. Nevertheless, markets may be sensitive to signs of growing inflation, especially with longer-term yields and stocks near multi-year highs.

Wage Growth is Manageable Compared to Last Tightening Cycle

“Wage pressures remain at manageable levels,” said LPL Research Chief Investment Strategist John Lynch. “Since wages can represent up to 70% of total business costs, it’s difficult to have a sustainable pricing threat without much participation from wages.”


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