One of the biggest stories of 2018 has been the robust economy and its extremely low unemployment rate. On top of the tight labor market, GDP growth hitting a four-year high during the second quarter and higher-than-expected CPI growth were in the headlines as well. Now, add in wage growth.
The August jobs report came in above expectations Friday. The pace of hiring increased, paychecks grew, and the unemployment rate was held steady. Nonfarm payrolls rose a seasonally adjusted 201,000.
Meanwhile, the average hourly earnings of all private-sector workers increased 10 cents last month to $27.16, which is a 2.9% increase from one year ago. This is the highest year-over-year rise in income earnings since 2009.
This most recent jobs report has been mostly propelled by the strong economy the U.S. is enjoying at the moment, endorsed by last year’s tax overhaul and high consumer confidence. Moreover, the second quarter had strong earnings, with U.S. corporate profits booming.
However, rising wages don’t always mean rising “real” wages, due to inflation. Though wage growth has picked up as shown in the August jobs report, it’s rising at about the same pace as consumer inflation. In other words, real wages have not actually risen.
In addition, the report shows that the pace of consumer spending is greater than the pace of income gain. Personal income rose 0.3%, whereas consumer spending rose 0.4%. This will most likely play a factor in the Fed’s decision regarding raising rates.
At the annual central banking conference in the Grand Tetons, the Fed showed its intent to keep raising interest rates— probably two more times. The Federal Reserve Chairman, Jerome Powell, said the current plan is to gradually raise rates as long as inflation is stable and unemployment keeps falling.
This jobs report is likely to reinforce the Fed’s plan to gradually raise interest rates. Even though the unemployment rate is at near 18-year lows and inflation is very close to the target rate of 2%, this data can be interpreted as a tipping point, especially with real wages remaining level.
One consequence of raising short-term rates that makes people weary is the possibility of inversion of the yield curve. Ideally, the long-term rate is higher than the short-term rate, thus having the yield curve at a good state. However, if the long-term rate doesn’t move higher when the short-term rate is increasing, then eventually the difference will become so meager that the yield curve will flatten, or even get inverted. The inversion of the yield curve is an important indicator of looming recessions.
Regarding the prospect of yield-curve inversion, Federal Reserve Bank of New York leader John Williams said Thursday that the possibility by itself will not be enough to prevent him from endorsing further hikes in rates.
Also, this past July, former Fed Chairman Ben Bernanke supported Mr. Powell by saying that the Fed takes multiple factors into consideration, not just the yield curve, when making decisions about monetary policy.
During the10-year expansion of the U.S. economy, many reports have shown that the economy is booming. Regardless, investors should still keep an eye out for any further progressions regarding the Fed’s decision, trade disputes, and the economy in general.
Despite the positive jobs report, with President Trump‘s hint at more China tariffs, the major benchmarks fell. This is reflected on the fund side of things, as the Dow Jones Industrial Average ETF fell 0.3%, the S&P 500 ETF(SPY - Free Report) fell 0.2% and the Nasdaq ETF (QQQ - Free Report) fell 0.4%.
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