How strong is wage growth?

September 11, 2018

Wage growth positively surprises

The labor market continues to make healthy gains with 201,000 net new jobs created in August. Although revisions subtracted 50,000 jobs from prior months, the overall trend remains robust with an average net gain of 207,000 new jobs per month in 2018. Fiscal stimulus is temporarily boosting the labor market as we anticipated. Although the unemployment rate held steady at 3.9 percent the U-6 underemployment rate declined to 7.4 percent, its lowest level since April 2001.

Employers continue to struggle to fill positions in a tight labor market: job openings remain near record levels despite continued job creation.

We have been expecting faster wage growth with the ongoing tightening in the labor market and we warned last month that wage growth could suddenly break out of a narrow range and head higher. Have we reached that point? It remains too early to say, but despite month-to-month volatility the upward trend in wages looks clear.

Wage growth during August exceeded expectations, reaching 2.9 percent on a year-over-year basis.

That marks the fastest rate of growth since June 2009 when wage growth was declining due to the Great Recession. Faster wage growth will help workers offset the impact of inflation, which has been running ahead of wage growth in recent periods and should continue to accelerate.

As we have mentioned in the past, very tight labor markets can drive wage growth. But the current labor market expansion has seen wage growth coming in roughly 1 to 1.5 percent below the rates attained during similar periods of labor market tightness. While blame lies partially with weak labor productivity and low inflation (both of which fundamentally drive wage growth), recent research suggests that erosion of labor's bargaining position plays a key role. Declining labor union membership, non-compete agreements, industry consolidation through mergers and acquisitions (leaving a few dominant superstar firms in an industry), and collusion among employers have eroded the bargaining power of labor, depressing wage growth. Despite this, we anticipate that continued labor scarcity and strong demand will drive wage growth higher, including the possibility that it could surge suddenly as we have previously seen. This level of wage growth provides the Fed with ample cover to raise rates when it meets later this month.

ISM data still showing strength

The ISM data for August showed continued strength in both the manufacturing and service sectors of the economy. The manufacturing index posted surprisingly strong results, showing strength in production, employment, and new orders.

Manufacturing continues to perform well and any negative impact from tariffs has not yet appeared.

The non-manufacturing index rebounded, coming in better than expectations. The overall data can swing from month to month, but the general picture still looks solid. Both indexes taken together paint a positive picture of the economy.

What else happened last week

International trade data for July showed a widening of the trade deficit (notably with China), the largest in five months. As we mentioned last week, trade looks like it will drag on economic growth in the third quarter, reversing the boost to growth it generated in the second quarter. Widening deficits should provide the administration with fodder to go forward with more tariffs, particularly on Chinese imports. Productivity growth in the second quarter accelerated, continuing an underlying trend of firming. But productivity growth remains weak by historical standards, limiting potential economic growth.

What it means for CRE

Accelerating wage growth benefits virtually all commercial real estate (CRE) property types, especially when coupled with job growth. Wage increases enable consumers to spend more readily, which most directly impacts demand for retail space. Consumers spending money spur revenue growth for companies, which enables them to hire more people to keep pace with growing demand for their goods and services (including at hotels which also receive a demand boost). Increased demand for goods typically means more demand for warehouse and distribution space to store a greater number of goods. And households also have more money to spend on rent when wages rise, a boon for the apartment sector. In short, accelerating wage growth should boost demand across the property type spectrum, particularly helpful at this relatively late stage of the economic expansion.

What we are watching this week

Inflation occupies the spotlight this week with data from the consumer price index (CPI), producer price index (PPI), and import prices for August coming out. All are expected to show increases; the only question will be the rate of acceleration. The Job Opening and Labor Turnover Survey (JOLTS) should show that job openings remain near record-high levels while turnover is increasing. Retail sales are expected to post another relatively healthy gain in August, even after July's strong showing. And preliminary consumer sentiment for September looks to hold steady relatively to August's final reading.

Thought of the week

The labor market has become so strong that some candidates aren't even showing up for interviews.

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