October’s jobs report was released today, and we see several encouraging trends in the data.
Nonfarm payrolls grew 250,000 last month, beating consensus estimates for a 200,000 gain, showing that jobs growth recovered strongly from September’s hurricane-influenced slowdown. The unemployment rate stayed at a 48-year low of 3.7%, and the labor force participation rate ticked up to 62.9%.
However, investors have been hyper-focused on wage data in economic reports recently to gauge whether wage pressures will force the Federal Reserve (Fed) to quicken its pace of monetary policy tightening. Average hourly earnings grew 3.1% year over year last month, the first time that measure of wage growth has eclipsed 3% since April 2009.
While markets may be sensitive to the uptick in wage growth, we think the current pace is sustainable and healthy for the U.S. economy. We also believe data on wages should be viewed in a historical context to understand the Fed’s current approach to policy. For this, we use the Employment Cost Index (ECI) as a historical indicator of where compensation costs have been during past tightening cycles. As shown in the LPL Chart of the Day, ECI year-over-year growth has averaged 2.4% in the current tightening cycle, far below the 3.3% average rise during the Fed’s last tightening cycle.
“The labor market is growing solidly, and 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.”
Compensation costs climbed as fast as 3.9% in the year before the Fed first hiked interest rates in April 2004, significantly above the 2.8% year-over-year increase last quarter. Wage cost growth was more benign before the beginning of the current tightening cycle, and it has remained manageable thanks to the Fed’s gradual interest rate hikes and careful policy approach.
For more analysis on the U.S. labor market and wage growth, check out next week’s Weekly Economic Commentary, which will be published November 5.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not bank/credit union obligations and are not endorsed, recommended or guaranteed by any bank/credit union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
Tracking #1-787923 (Exp. 11/19)