The Waiting: Wage Growth and Inflation Finally Getting in Gear?

Key Points

  • Hurricanes impacted job growth; but not unemployment or wages, which both showed a big improvement.

  • Median wage measures tell a much brighter story than average wage measures; while the Underlying Inflation Gauge suggests more inflation than traditional measures.

  • Punchline: Fed raises rates in December.

The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part

- Tom Petty’s The Waiting

We’ve been waiting for some time for the tightness of the labor market to finally translate into higher wages; and in turn higher inflation. Did that day come on Friday?

Friday’s jobs reported disappointed on headline payrolls—there was a net loss of 33k payroll jobs in September vs. the consensus expectation of 80k—but the weakness was largely driven by Hurricanes Harvey and Irma. Nearly 1.5 million people were unable to work due to bad weather, the most since January 1996. Much less affected by the hurricanes were the unemployment rate and wage growth. According to the Labor Department, the hurricanes had a “net effect” of reducing nonfarm payrolls in September, while there was “no discernible effect” on the unemployment rate (UR).

To put the impact of the hurricanes in historical perspective, in the two months following Hurricane Katrina in 2005, payrolls averaged 76k—which was down sharply from a monthly average of 249k in the prior six months. They ultimately rebounded to 259k per month over the subsequent six months.

Good news for unemployment and wages

In September, the UR fell to 4.2%, the lowest level since February 2001; while average hourly earnings (AHE) jumped to 0.5% month/month; which is up 2.9% year/year, up from 2.7% year/year just last month. The UR is calculated from the Household Survey and the 0.2 percentage point drop came in spite of an uptick in the labor force participation rate. It was boosted by the household survey employment series, which surged by 906k, which is a massive increase in a single month.

Wage growth has become a hot topic; and Friday’s release was on the hotter side. But some enthusiasm curbing may be in order given that the hurricanes did prevent some lower-paid Americans from working, which may have biased up September’s reading. Speaking of the vagaries of wage data, let’s dive into the numbers in a little more detail; with an update on a subject about which I’ve written quite often.