Employment is a lagging indicator, so it is unwise to put too much weight on the pace of hiring. However, the very high reliance of U.S. growth on household demand gives labor indicators a special place in reading the economy. To a large extent, the Fed’s optimism about the domestic economy is based on improving household spending capacity, so a look at the math of household income is useful.
Figure 1: Real Wage Gains Accelerating (y/y % change)
Sources: Bureau of Labor Statistics, Continuum Economics
The 12-month average monthly pace of hiring, at 234,000, is the strongest since mid-2015. Additionally, an accelerating trend in wage gains persists despite a one-month deceleration in January. Oil prices, currently little changed from a year ago and down from the 2018 average, have helped lift the inflation-adjusted average hourly earnings gain to over 1% y/y for the past three months, a mark that hasn’t been hit since late 2016 (Figure 1). Spread that gain across 2.8 million new jobs over the past twelve months (a 1.9% gain) and a household’s ability to spend based on wage gains has risen by nearly 3% in real terms.
Hiring cannot continue indefinitely at its recent pace, but rising wages have attracted more workers into the market. The labor participation rate has risen steadily since August of last year and is now at the highest rate since 2013. There is apparently further room for improvement, as long as wage gains continue.
Fed concern will remain focused overseas and on financial conditions for now.