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Economic Insights

A larger-than-expected increase in average hourly earnings is likely due to one-time factors.  

It seems somehow apt that a U.S. jobs report released on Groundhog Day reminded data watchers of the time-loop trope of the eponymous 1992 film. The U.S. Bureau of Labor Statistics’ January employment report, issued on February 2, 2018, looked fairly much the same as the previous report, and numerous reports before that, a testament to the consistent path of U.S. labor market improvement. The January data showed that employment gains were basically on target for the month, with a 200,000 increase in nonfarm payrolls, only slightly higher than the average of the past 12 months. As employment gains have continued to exceed the amount needed to hold the unemployment rate steady, we should expect a decline to below 4% to be reported very soon.

There were no notable industry “distortions” in January, so the payrolls number looks fairly “clean.” Since employment only needs to rise by about 80,000 per month to absorb new entrants to the labor force, the recent pace of job gains is consistent with a falling unemployment rate over the medium term.

The market’s primary concern about the January jobs numbers was not the number of jobs added but rather the pace of wage growth and its implications for inflation. Average hourly earnings (AHE) rose 0.3% for the month, while December 2017 was revised, from 0.3% to 0.4%. This took the headline AHE increase up to 2.9% year over year, 0.3% higher than the average over the past three years.

While the headline AHE number caused some discomfort in financial markets, sending U.S. equity prices steeply lower and Treasury yields higher, a closer look at the compensation data suggests investor concerns may be overdone. To wit, the increase for production and non-supervisory workers in January was only 0.1%, implying that most of the 0.3% gain for all workers was in the form of bonuses and other one-time payments. Since those are nonrecurring events, they are not, thus, inflationary. In fact, the 0.1% monthly increase for production workers in January brought the year-over-year increase to 2.4%. That’s right in line with the average of the past three years.

Elsewhere in the report, the drop in the average workweek, from 34.5 hours in December 2017 to 34.3 in January, means that the increase in nominal hourly earnings was more than offset by a decline in hours worked, leading, likely, to a decline in aggregate nominal wage and salary income in January.

In summary, the income implications of the January employment report were actually negative for consumer spending in the short term, and do not imply that pressure on labor costs is increasing. 



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