Market Perspective: Searching for Spring

The transition between winter and spring is often contradictory. Green shoots push through snowdrifts, while spring-like warm days revert to cold nights. The economy is in a similar transition, as central banks' efforts to chill inflation face new signs of economic growth.

The big question, of course, is whether the Federal Reserve and other central banks will find a way to subdue inflation without causing a recession. As with the weather, though, the signs are frustratingly muddled. Corporate earnings, for example, have weakened, while other evidence suggests global manufacturing activity is actually strengthening. At the same time, longer-term Treasury yields have risen as the Fed has signaled it's not done raising interest rates just yet.

The absence of clarity can be unsettling. Here's how we see things shaping up.

U.S. stocks and economy: Mixed signals

Two measures from the labor market underscore this contradictory moment. Wage growth is slowing but remains fairly high. However, whereas growth in average hourly earnings—a comparatively noisy measure of workers' gross pay—has slowed relatively quickly, the Atlanta Fed's Wage Growth Tracker—which measures the median percent change in workers' hourly wages—hasn't moved as much. This presents a problem for the Fed, because such "sticky" wage growth could pose inflationary risks. If signs of further weakening don't appear, the Fed may decide to push short-term interest rates even higher.

Median wage growth has remained "sticky" even as average hourly earnings declined

Chart shows the Atlanta Fed’s Wage Growth Tracker 12-month average percentage change alongside the year-over-year percentage change in average hourly earnings. Wage growth hasn't slowed at the same pace as average hourly earnings have.

Source: Charles Schwab, Bloomberg, as of 1/31/2023.

Atlanta Fed's Wage Growth Tracker is a measure of the nominal wage growth of individuals.