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NFP Reaction: Wages Wages Wages!

NFP Reaction: Wages Wages Wages!

Despite the president’s protestations, the actual data makes it clear that US job creation has downshifted in recent years, though that is not entirely unexpected or even necessarily negative for the labor market. Heading into today’s report, the trend was showing continued moderation over the last four years:

  • 2014: 250,000 jobs created per month
  • 2015: 226,000 jobs created per month
  • 2016: 187,000 jobs created per month
  • 2017: 171,000 jobs created per month

Indeed, 2017’s 171k reading was the lowest average monthly gain in US jobs since 2011! As many economists have noted, the slower rate of jobs growth could represent a “tightening” labor market, where much of the population that wants a job already has one. In other words, it could suggest that the balance of supply and demand for labor has shifted in favor of the workers, and in that way, slower job growth may be seen as a positive for the economy.

With that as a backdrop, we just received the non-farm payroll figures for January, and at first glance, 2018 is off to a strong start. On a headline basis, the US economy created 200k net new jobs in January , slightly above the 181k expected by economists. This solid figure was also accompanied by a +12k revision to last month’s jobs report.

More importantly, we’re finally starting to see signs of declining “slack” in the labor market. Namely, the average hourly earnings figure printed at 0.3% month-over-month, with last month’s reading revised up to 0.4% m/m growth. That strong reading drove the year-over-year growth rate in hourly earnings to 2.9%, the highest rate of wage acceleration since the Great Financial Crisis in 2009. Annual earnings growth has now exceeded the “core” CPI measure of inflation for 62 consecutive months!

Market reaction

In a way, markets have reacted perfectly as expected to today’s jobs report. The acceleration in wage growth increases the likelihood that the Fed will be more aggressive in hiking interest rates (by potentially four times this year for instance), so we’ve seen the dollar rocket surge to become the best-performing major currency on the day.

Meanwhile, bonds have accelerated their recent losses, with the benchmark 10-year treasury now yielding 2.84%, up nearly 20 basis points on the week. US Stocks are in the dumps, with the Dow Jones Industrial Average trading off by 340 points and the S&P 500 falling by 30 (both in excess of 1% lower) as of writing. If we truly are reaching a turning point for US wages, we would expect these moves to carry over in the days and weeks to come.

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