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 MRB Partners Inc © 09/2018 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 MRB PARTNERS INC. m www.mrbpartners.com m Copyright 2018©(see final page for full copyright) 2 mrb U.S. MONTHLY CHARTPACK m September 13, 2018 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 MRB PARTNERS INC. m www.mrbpartners.com m Copyright 2018©(see final page for full copyright) 3 mrb U.S. MONTHLY CHARTPACK m September 13, 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 MRB PARTNERS INC. m www.mrbpartners.com m Copyright 2018©(see final page for full copyright) 4 mrb U.S. MONTHLY CHARTPACK m September 13, 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 MRB PARTNERS INC. m www.mrbpartners.com m Copyright 2018©(see final page for full copyright) 5 mrb U.S. MONTHLY CHARTPACK m September 13, 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 MRB Partners Inc © 09/2018 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 MRB PARTNERS INC. m www.mrbpartners.com m Copyright 2018©(see final page for full copyright) 6 mrb U.S. MONTHLY CHARTPACK m September 13, 2018 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 MRB Partners Inc © 09/2018 2000 2005 2010 2015 * Smoothed; source: Federal Reserve Bank of Richmond Note: - - - denotes 1997-2018 mean MRB PARTNERS INC.