U.S. Wages: Onward and Upward

MacroResearchBoard MONTHLY CHARTPACK mrbpartners U.S. Independent Investment Strategy September 13, 2018

U.S. Wages: Onward And Upward

U.S.: Hourly Wages, Production And Nonsupervisory m U.S wage growth is in a clear Workers* (%YoY) broad-based upcycle.

m Employment momentum is 3.5 – – 3.5 historically solid, amid an already tight labor market. This will maintain upward pressure 2.5 – – 2.5 on wages in the coming months.

m Business surveys corroborate 1.5 – – 1.5 this outlook, showing still-solid MRB Partners Inc © 09/2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 hiring plans and improving * Source: U.S. Bureau of Labor Statistics wage intentions amid reports of hard-to-fill job openings. However, labor costs are not being reported as problematic for now.

m Businesses are reporting that a lack of available labor appears to be holding back economic growth, underscoring that the pressure on wages will intensify.

m The wage acceleration points to a modest step-up in consumer spending, which has been flatlining for several quarters.

m Wages are clearly responding to diminished economic slack albeit with a lag; the wage-Phillips curve mechanism continues to work in the economy.

m Wage trends bolster the case for the Fed to follow through on its policy rate path for the foreseeable future, beginning with two more rate hikes this year and additional hikes in 2019. mrb U.S. MONTHLY CHARTPACK m September 13, 2018

Labor Market Momentum Remains Solid

U.S.: Total Nonfarm Employment* (Mth Chg, 000s) In August, payrolls rose 201,000, close to their 6-month average pace. The pace remains consistent with above-potential economic growth. 300 300 Still in expansion This momentum, squeezing an already tight labor territory market, has fed through to an unmistakable rise 200 200 in wage growth: average hourly wage growth for production workers is now 2.8% YoY, the highest rate of this expansion, and consistent with our expectation 100 100 since wage growth slowed to 2.2% YoY last year1.

The pickup in wages this year has been driven by services-providing sectors, which dominate goods 2013 2014 2015 2016 2017 2018 * Source: U.S. Bureau of Labor Statistics MRB Partners Inc © 09/2018 producing industries in terms of their share in the Note: - - - denotes 6-month average economy. Services wages are also less historically

U.S.: Hourly Wages, Private Production And Nonsupervisory volatile and are slow-moving, suggesting the upward Workers* (%YoY): Total Private momentum will persist for some time to come. 4 4

3 3

2 2

Goods Producing 4 – Services-Providing – 4

3 – – 3

2 – – 2

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 * Smoothed; source: U.S. Bureau of Labor Statistics

1 MRB Research Highlight, "Dissecting U.S. Inflation & Wages: Not As Bond Friendly As Perceived", October 5, 2017

Services Wage Growth Is Rising

U.S.: Professional And Business Services Employment* U.S.: Durable Goods Employment* (Mth Chg, 000s) (Mth Chg, 000s)

80 – – 80 20 – – 20

40 – – 40 0 – – 0

-20 -20 0 – – 0

Hourly Wages, Production And Nonsupervisory Hourly Wages, Production And Nonsupervisory Workers** (%YoY): Workers** (%YoY):

2.5 – – 2.5 2.5 – – 2.5

2.0 – – 2.0 1.5 – – 1.5

Durable Goods 1.5 – – 1.5 Professional And Business Services Total 0.5 – MRB Partners Inc © 09/2018 – 0.5 Total

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 * Source: U.S. Bureau of Labor Statistics * Source: U.S. Bureau of Labor Statistics ** Smoothed; source: U.S. Bureau of Labor Statistics ** Smoothed; source: U.S. Bureau of Labor Statistics Note: - - - in panel 1 denotes 3-month average Note: - - - in panel 1 denotes 3-month average MRB Partners Inc © 09/2018

U.S.: Education And Health Services Employment* (Mth Chg, 000s) The softening in wage growth last year was clearly the lagged result of the prior mid-cycle slowdown in manufacturing; the wage softening was entirely 40 – – 40 driven by goods-producing sectors. The wage rate in the goods sector recovered over the second half of last 20 – – 20 year and is now tempering, albeit at a still-high level. 0 – – 0 Meanwhile, the sector-level data shows wage growth Hourly Wages, Production And Nonsupervisory Workers** (%YoY): accelerating in services like healthcare and professional 2.5 – – 2.5 business services, where the momentum of job gains has been solid, and the sector unemployment rate 2.0 – – 2.0 is at historic lows. The Fed’s September Beige book highlighted shortages in occupations like truck drivers, 1.5 – – 1.5 Education And Health Services as well other as lower-skill services workers. Total

2013 2014 2015 2016 2017 2018 * Source: U.S. Bureau of Labor Statistics ** Smoothed; source: U.S. Bureau of Labor Statistics Note: - - - in panel 1 denotes 3-month average MRB Partners Inc © 09/2018

The Labor Market Is Tight

U.S.: Unemployment Rate* (%) The unemployment rate remains at its lowest level since the 1990s expansion. 9 – – 9

The U-6 measure of unemployment and 7 – – 7 underemployment, and the share of those employed part-time for economic reasons, have continued to 5 – – 5 decline, though both remain somewhat shy of the pre- 2001 benchmark. U-6 Unemployment Rate* (%) 16 16 In general, the indicators show a tight labor market.

12 12

Surpassed '05 8 8 but not '00

Part-Time Employees For Economic Reasons, Share Of Total Underemployed* (%)

6 6

4 Some 4 room to decline

1995 2000 2005 2010 2015 * Smoothed; source: U.S. Bureau of Labor Statistics Note: Shaded for NBER-designated U.S. recessions Note: - - - denotes 1995-2008 minimum MRB Partners Inc © 09/2018

The Participation Rate Remains Depressed

U.S. Labor Market Cycles, Recession Troughs To Peaks*: Following a historically unusual decline and a slow Nonfarm Payrolls recovery, the prime-age labor force participation rate 120 120 still remains depressed and continues to contribute to a tight labor market. In comparison, payrolls and hourly earnings have recovered faster than participation, 110 110 Slow though their performance is lagging previous cycles by recovery about three years, consistent with the more sluggish

100 100 overall economic recovery in the early years of

Average Hourly Earnings, Production And Nonsupervisory this expansion. 140 140 Workers Workers

120 120

2009-Present 2001-07 100 1991-2001 100 1982-90 1975-80 (all panels) 25-54 Years Age Labor Force Participation Rate

Unusual 104 decline 104 and slow recovery

100 100

Years * Smoothed; source: U.S. Bureau of Economic Analysis Note: Rebased to NBER-designated cycle trough denoted by vertical line; 1980-81 recessions combined; - - - denotes latest value MRB Partners Inc © 09/2018

The Participation Rate Remains Depressed

U.S.: Employment To Population* (%) The overall participation rate is flat-lining, but the

64 – aging of the labor force gives it a downward bias

– 80 that is being offset by the prime-age participation

62 – rate recovery.

– 78 There is room for the prime-age participation rate to All Ages (LS) 60 – Ages 25 To 54 (RS) rise further, which should offset the significant future – 76 (all panels) projected drag from the aging population.

Labor Force Particpation Rate* (%) Continued solid labor market momentum should 84 encourage gains in prime-age participation. On net 66 – 83 however, the unemployment rate will remain low and 65 – Still depressed should continue to put upward pressure on wages for 64 – 82 some time.

63 – 81 MRB Partners Inc © 09/2018

1985 1990 1995 2000 2005 2010 2015 * Smoothed, source: U.S. Bureau of Labor Statistics Note: - - - denotes the previous cycle peak for ages 25 to 54 years

U.S. Labor Force Participation Rate (%): Historical* Projected**

66 – – 66

Downward bias from 64 – – 64 an aging population

62 – – 62

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1985 1990 1995 2000 2005 2010 2015 2020 2025 * Source: U.S. Bureau of Labor Statistics ** MRB calculation Note: Shaded for NBER-designated U.S. recessions

Wage And Hiring Outlook

U.S.: Output Gap* (%, LS) We continue to expect wage growth to continue Hourly Wages, Production And strengthening going forward. Wages have been late to Nonsupervisory Workers** (%YoY, RS) respond to economic slack this cycle, but apart from – 4 6 – this delay, are behaving in a historically consistent Upside fashion with slack. Output growth continues to exceed ahead 4 – its potential growth rate, implying further upward – 3 Now pressure on wage growth for at least the next 12-18 2 – behaving months. normally – 2 0 Business survey wage gauges have accelerated sharply in recent months, as have firms’ intentions for future Late to respond MRB Partners Inc © 09/2018 wages. 1990 1995 2000 2005 2010 2015 2020

* Advanced 6 quarters; source: Congressional Budget Office ** Source: U.S. Bureau of Labor Statistics Note: Shaded for NBER-designated U.S. recessions; the output gap is the percent deviation of actual real GDP from potential real GDP

U.S.: Richmond Fed Manufacturing Survey*: Current Wages 20 20

10 10

0 0

6-Months Ahead Expected Wages

50 50

40 40

30 30

20 20

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2000 2005 2010 2015 * Smoothed; source: Federal Reserve Bank of Richmond Note: - - - denotes 1997-2018 mean

Wage And Hiring Outlook

U.S.: Manpower Net Employment Outlook* (%) The Q4 Manpower survey of hiring intentions continued to grind higher; hiring plans for manufacturers have come off their recent peaks marginally, but they remain 20 – – 20 historically elevated. (There is not much evidence that elevated trade tensions have taken enough of a toll on manufacturers, or other sectors, to delay plans to

10 – – 10 expand their workforce).

0 – – 0

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1985 1990 1995 2000 2005 2010 2015 * Source: Manpower Group Note: Shaded for NBER-designated U.S. recessions

U.S. Federal Reserve Regional Business Surveys: Average Hiring Plans* Slight cooling but still high

20 20

10 10

0 0

-10 -10

2002 2004 2006 2008 2010 2012 2014 2016 2018 * Smoothed; source: Federal Reserve Banks of New York, Philadelphia and Richmond

Wage And Hiring Outlook

U.S.: Small Business Survey*: The small business survey captures present labor Hiring Plans market dynamics well. Firms’ hiring intentions are 20 20 at historical highs, however, so is the percent of firms reporting at least one hard-to-fill position. 10 10 Consequently, the quality of labor is being reported by firms as the most important problem they face 0 0 at present.

This week’s Beige Book reported that overall business Compensation Plans Higher activity is being held back by the dearth of available 20 20 and qualified labor.

The paucity of qualified labor has fueled a spike in 10 10 small business wage plans, though they remain shy of prior peak levels. Note that the number of firms reporting a problematic cost of labor is still low but has 40 Hard-To-Fill Jobs Openings 40 been grinding higher; this is something to keep an eye

30 30 on for the future.

20 20

10 10

Labor Quality As Single Biggest Problem

20 20

10 10

8 Labor Cost As Single Biggest Problem** 8 Not yet a 6 key concern 6

1995 2000 2005 2010 2015 * Smoothed; source: National Federation of Independent Business ** Smoothed 6 months Note: - - - denotes 1986-2018 smoothed maximum

Labor Market Churning Is Wage-Friendly

U.S.: Atlanta Fed Wage Growth Tracker* (%YoY): A way to trade-up into higher-paying jobs, quits are an

Total Weighted essential component of the aggregate wage growth 4 4 process in the economy. This is evident from the Atlanta wage tracker, which was showing a widening 3 3 gap in wage growth between those who continued to work in the same jobs over a year, compared to job switchers. 2 2

Quits (as a share of payrolls) have perked up recently.

Same Job At present, they have crossed the peak of the prior 4 Switched Job 4 cycle, but are somewhat short of the 2000 peak. The pickup supports our view of continued upward wage 3 3 pressure ahead.

2 2 Greater turnover in the labor market will help resolve

2006 2008 2010 2012 2014 2016 2018 gauges over time, as firms try to retain existing labor, * Source: Federal Reserve Bank of Atlanta though the latest Beige Book indicated that firms were using bonuses, or non-wage incentives to retain U.S.: Nonfarm Job Quits To Payrolls Ratio* (%) labor at present. At the end of the day, however, overall compensation will climb, and consumers will feel more encouraged to spend, increase the risk of 2.2 – – 2.2 higher inflation.

1.8 – – 1.8

1.4 – – 1.4

2002 2004 2006 2008 2010 2012 2014 2016 2018 * Smoothed, source: U.S. Bureau of Labor Statistics Note: - - - denotes previous cycle peak; solid line denotes maximum

Wages, Consumers and Fed Policy

U.S. Consumer Confidence*: Consumers’ current assessment of labor market Jobs Plenty Less Hard To Get momentum is stronger than the historical average. 40 40 In comparison, consumers’ income expectations have been slow to take off, though the caution is consistent

0 0 with the prior volatility in wage growth and the scars remaining from the late-2000s.

-40 -40 However, expectations are now running above average. Consumer spending growth has been essentially Expectations, Income 6-Months Ahead flatlining at 2.6% for the past several quarters, and the

30 30 savings rate has also remained flat. The acceleration in wages, and pickup in consumers’ income expectations support a modest step up in consumer spending. Data 20 20 so far for Q3 indicate such a step up is occurring.

10 10 The pickup in wages underscores that the wage MRB Partners Inc © 09/2018 Phillips curve is alive and well, and the risk to wage 1980 1985 1990 1995 2000 2005 2010 2015 growth is tilted to the upside. Further, the Fed’s latest * Smoothed; source: The Conference Board Note: - - - denotes 1980-2018 mean Note: Shaded for NBER-designated U.S. recessions Beige Book report labor markets as “tight throughout the country, with most Districts reporting widespread shortages”.

These factors bolster the case for the Fed to remain on course on their signaled future policy rate path, beginning with a policy rate hike this month, and another in December this year. The fixed-income markets are still not prepared for a rising wages and inflation outcome, with the parallel increase in the Fed’s long-run “neutral” policy rate.

Prajakta Bhide

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