US Employment Report Highlights Trends in Wage Growth

Federal Reserve Chairman Jay Powell's recent comments about the labor market not being as tight as before sparked debate among analysts and traders.

by Faruk Imamovic
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US Employment Report Highlights Trends in Wage Growth
© Getty Images/Scott Olson

Federal Reserve Chairman Jay Powell's recent comments about the labor market not being as tight as before sparked debate among analysts and traders. The primary focus now is on today's U.S. employment report, specifically the figures related to wage growth rather than job creation.

This shift in focus comes in light of significant immigration inflows which, according to Powell, may have eased the labor market pressures. Powell's perspective suggests a scenario where softer wage increases could be a more reliable indicator of labor market conditions than the sheer number of jobs added.

This theory is underpinned by a slowdown in labor-market turnover and specific employment indicators such as the six-month annualized average growth rate of wages, which has remained below 4.0%, aligning with a target inflation rate of 2%.

Debating Powell's Perspective

Despite Powell's dovish stance, indicating an anticipation of a "soft" employment report, recent data does not fully support his view. For instance, the ADP reported that private non-farm employment grew by 192,000 in April, and initial jobless claims have consistently hovered around 210,000 per week since October 2023.

Moreover, robust non-farm payroll (NFP) growth, projected to be around 225,000, further complicates Powell's narrative. However, signs of labor market loosening are evident in other areas. The unemployment rate has ticked up slightly, the proportion of part-time workers citing economic reasons has increased, and the participation of prime-age workers has plateaued.

Additionally, private-sector hiring and the rate at which employees quit their jobs have both declined. Secondary indicators like the New York Fed’s job separation expectations index and the Philadelphia Fed’s index tracking worker transitions suggest a trend towards greater job market looseness.

Market Implications and Fed Dynamics Today's focus will be on the Average Hourly Earnings (AHE) report. A lower-than-expected increase, such as a steady 0.3% rise, could validate Powell's assertions about the easing labor market.

Such data could potentially influence bond yields, pushing them slightly lower. Nevertheless, caution remains advised as Powell's less-concerned outlook about inflation may not resonate with other Federal Reserve officials who are wary of other inflationary pressures from structural economic changes.

Fed officials are likely to maintain a cautious approach in the coming days, possibly adopting a more hawkish tone than Powell. Their discussions might pivot around long-term inflation considerations linked to factors like climate change, decarbonization, deglobalization, and global conflicts, contrasting with Powell's more reserved approach on these contentious issues.

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