Inflation Feared Less
There was so much information in the February labor report, it needs a few articles to get through each data point and explain what each indicator means. The stock market rallied because there was jobs growth, but not much wage growth. In the previous few years of this expansion, the market wanted wage growth because it meant the consumer would have more disposable income. Now that the Fed is more hawkish, wage growth is bad because it signals inflation is picking up which can cause more rate hikes. It’s all about whether the market fears a recession or inflation more. Ultimately, inflation causes a recession, but it occurs in a different order than a double dip recession.
Wage Growth Missed Estimates
Average hourly earnings were up only 0.1% month over month. This missed estimates for 0.2% growth and was down from last month’s report of 0.3% growth. On a year over year basis, hourly earnings were up 2.6% which missed estimates for 2.9% growth. The prior month’s growth rate was revised down from 2.9% to 2.8%. The market had a huge reaction to the average hourly earnings growth last month as the 10 year bond yield increased quickly and stocks fell. Investors thought the economy was going through a phase change where inflation was going to explode. Inflation will pick up from last year, but there is no need to panic. I think the Fed will raise rates 3 times and the economy will be relatively stable. The Fed will be hawkish in 2019. How hawkish it gets will depend on inflation. Therefore, the market’s panic was about a year early. I’m not saying stocks will crash next year, but the wage growth issue will be real at that point.
Weekly Earnings Are Important
One other point worth noting is the average work week increased from 34.4 hours to 34.5 hours. This beat the estimate for 34.4 hours. Often times the work week and the hourly earnings rate affect each other. When the work week shortens, wage growth is fast and when the work week lengthens, wage growth is slow. That’s why weekly earnings are important to follow. Weekly earnings growth was 2.9% year over year. On a month over month basis, weekly earnings growth was 0.44%. As you can see, those results are better than the hourly results because the work week got longer. This data makes the result less shocking.