Like much of the economic data over the past few months, the latest employment numbers were met with mixed results. Overall, the labor market remains strong. But celebrations were quickly tempered by a continuing weakness within the employment data – anemic wage growth.
Released each month by the U.S. Department of Labor, the Employment Situation reports the number of jobs added, employee wage growth and the current national unemployment rate, among others. Its impact is significant. Simply put, jobs lead to earnings and earnings lead to disposable income. As consumer spending accounts for over two-thirds of all U.S. economic activity, jobs and wages are the very heart of vibrant economic growth.
Employers continue to hire at a robust pace, adding 222,000 non-farm jobs in June, beating the consensus estimate of 170,000. June was the 81st consecutive month of reported job gains, dating back to October 2009. The non-farm jobs data is the benchmark gauge for job growth, reflecting the change in the number of Americans employed, excluding the farming industry, private household workers and nonprofit organizations. The national unemployment rate rose from 4.3 percent, a 16-year low, to 4.4 percent. The rate increase was attributed to a rise in the number of once despondent Americans restarting their job search; a sign of confidence in the labor market.
Employment numbers for the first half of the year were solid, averaging 180,000 new non-farm jobs each month. Though a slight decrease from the 2016 monthly average of 187,000, it is well above the roughly 100,000 jobs needed each month to absorb new entrants into the labor force and keep pace with economic growth. The Federal Reserve, tasked with establishing America’s monetary policy, expects the labor market to continue at, or near, full employment – the point at which nearly all job seekers have found work. The Fed projects a sustainable unemployment rate of 4.3 percent throughout 2017 and a rate of 4.2 percent in 2018 and 2019.
But a closer look at the employment data reveals that employee wage growth remains lackluster. The Fed and the financial markets have certainly taken note of this, and with good reason.
Average hourly earnings rose 4 cents, or 0.2 percent, in June to $26.25/hour. Year-over-year, earnings increased just 2.5 percent, slightly below the 2.55 percent average annual increase realized through the first six months of the year. For 2016, the average annual growth rate for wages was 2.63 percent. This does reflect an improvement over the 2 percent wage growth that underwhelmed through much of the economic recovery. However, current growth still falls short of the 3-4 percent growth rate typically seen in times of economic expansion.
One may argue that some wage growth is better than none. But in reality, the U.S. economy is driven by consumer spending. And despite a strong labor market and high consumer optimism, Americans are already struggling to convert their earnings into purchases. The Fed realizes its path lies with the American consumer, and continuing weakness in disposable income appears symbolic of a U.S. economy still trying to kick into a higher gear.
So where does this leave the Fed?
Apart from the occasional dips and blips, consensus points to continued strength in the labor market. Solid employment growth should remain the Fed’s biggest asset to its agenda of interest rates hikes, adding one more this year and three each year in 2018 and 2019. Wages are expected to grow at a modest pace, though there is doubt they will reach the implied 3.5 percent target growth rate needed for the Fed to meet its current economic projections.
The Fed believes, at some point, a tightening labor market will lead to rising wages, triggering consumer spending and inflationary pressures. Unfortunately, lackluster economic growth and tepid inflation still remain, despite an economy that’s averaged over 180,000 new jobs a month for the past year and a half. The current weakness, it concludes, is temporary and should pick up over the course of the year. But as we’ve seen before, what the Fed wants, and what it eventually gets, can be two entirely different things.