US Labor Expense rises as investors widely expected that Federal Reserve officials would maintain the current benchmark interest rate following the conclusion of their two-day meeting. This decision comes amid growing speculation of a potential rate cut in March, driven by recent economic figures.
Neil Dutta’s Insight: Labor Productivity and Inflation Objectives
Neil Dutta, Head of Economics at Renaissance Macro Research, underscores the connection between the recent 1.5% to 2.0% rise in labor productivity and the pace of compensation growth. Dutta suggests that aligning with the Federal Reserve’s inflation objectives should be a guiding factor. He also warns against potential downside risks if the Fed delays action.
“Dutta emphasizes productivity’s rise linking to compensation growth, urging Fed alignment to avert potential risks,” said Wall Street Journal Subscription.
Employment Cost Index (ECI): A Moderating Trend
The Employment Cost Index (ECI) reveals a 4.2% increase compared to the previous year, marking the smallest annual advance since the end of 2021. While showing moderation, the index remains notably higher than the pre-pandemic pace.
Economists’ Preference: ECI Over Other Metrics
Economists favor the ECI over other frequently published earnings metrics due to its resilience to distortions caused by shifts in employment composition. It holds the distinction of being the Federal Reserve’s favored wage measure.
Wage Growth Moderation: Wages and Salaries Reflect Trends
Wages and salaries for civilian workers experienced a 0.9% increase in the fourth quarter, resulting in a 4.3% rise from a year earlier. This marks the smallest annual increase since 2021, indicating a moderation in wage growth.
Resilient Consumer Demand: Impact of Real Earnings Growth
Inflation-adjusted private-industry compensation saw a 0.7% increase, while wages rose by 0.9% in the fourth quarter. The resilience of the job market and positive real earnings growth have played pivotal roles in sustaining consumer demand.
Sectoral Variations: Service Workers and Goods-Producing Industries
Service workers in the private sector experienced a deceleration in wage growth during the fourth quarter, while worker pay in goods-producing industries accelerated. The Federal Reserve closely monitors a subset of inflation known as core services excluding housing.
Broad Slowdown Signals: Atlanta Fed’s Wage Growth Tracker
Additional metrics, including the Atlanta Fed’s wage growth tracker and indicators related to US Labor Expense, suggest a broader slowdown in wage growth. The tracker, a three-month moving average of median pay, has stabilized at its slowest pace in two years.
Looking Ahead: January Jobs Report Anticipated
The upcoming January jobs report is set for release on Friday. Analysts anticipate that it will disclose a continued slowdown in average hourly earnings for the month. This report will provide additional insights into the ongoing trends in the labor market.
“The anticipated January jobs report may reveal a sustained dip in hourly earnings, shaping labor market trends,” according to Barron’s.