Those skeptical of the U.S. recovery often cite fairly meager wage growth as evidence. Indeed, last week, the government released the weakest Employment Cost Index (ECI) number since 1982.
However, wage growth numbers are more nuanced than they may first appear. A close look at them reveals yet another sign that the U.S. recovery remains uninspiring but still, from a global perspective, more solid than many believe.
While the latest ECI was certainly disappointing, the weakness partly stemmed from naturally volatile incentive-based compensation, with much of the weakness in the “sales and offices jobs” category. When you exclude that data, you get a much more positive picture of wage growth, with the latest reading showing only a modest slowdown in growth.
Meanwhile, though many market watchers focused on how last month’s Average Hourly Earnings (AHE) figure came in flat and below economists’ expectations, much less attention has been given to precisely why it disappointed. There are a few reasons, but an important one is the fact that employment gains have largely come from the youngest (20 to 34 years) and oldest (65+ years) age cohorts. These age groups tend to earn lower wages than those in their prime earning years. This means that people are getting hired; they’re just making less.
Moreover, there is a significant industry mix shift taking place in the economy, whereby some industries are adding jobs much more rapidly than others, so looking just at gross average wages can end up providing a misleading picture. For example, the leisure and hospitality sector has added more jobs since 2012 than the manufacturing and construction sectors combined, despite being a smaller part of the economy. Yet since the manufacturing and construction sectors pay nearly double these service sectors, the overall average wage level has appeared subdued due to the shift, as the figure below shows.
In addition, real wage growth is already quite strong, given the very low rate of inflation, and it’s worth noting that traditional wage growth numbers don’t capture benefits and incentives, which have become a much more prevalent form of compensation in recent years.
Looking forward, I’ll be paying close attention to Friday’s July payroll report, and particularly to the average hourly earnings (AHE) component. I expect payrolls growth to continue at a fairly strong pace, and wages should eventually follow employment levels higher, particularly if we continue to see solid recovery in the residential housing sector, allowing higher wage construction jobs to pick up. But if the AHE wage growth figure also disappoints, we’ll likely be looking at a December, rather than a September, Federal Reserve liftoff.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The Blog.