United States

Tightening labor market points to rising wages in 2015


After several false dawns, economic and financial conditions have now fallen into place to support stronger job gains followed by rising wages in 2015. For the first time in the current business cycle there is a broadening out and deepening of prosperity. This is likely to bolster consumer and business confidence, setting the stage for acceleration in spending and another solid year of economic growth. .

November's employment data should assuage doves on the Federal Reserve that have been hesitant to support rate increases next year. While we believe the first rate increase will probably take place in June of next year, risks are increasingly tilted toward an earlier rate hike, especially if the economy continues to generate jobs at the current pace and economic growth above 3 percent.  

After 10 straight months of job gains in excess of 200,000, the details of the November report show the economy added 321,000 jobs. The October report was also revised higher, to 243,000 from a first estimate of 214,000. During the past three months total job gains have averaged a strong 278,000 and have primarily been created by small and middle market firms. Looking at the pace of jobless claims, which stands at 314,000, and the number quits in the job openings and labor turnover (JOLTS) survey data, which was more than 2 million in the latest estimate, it is clear the labor market is not only tightening, but space is being created to attract into the workforce those that are marginally attached or working part time for economic reasons

In fact, our preferred metrics on the health of the labor market, the U6-U3 spread and involuntary unemployment, both improved in November, with the former falling to 5.8 percent and the latter declining to 6.85 million. Involuntary unemployment is now below 7 million for the first time since October 2008.

Source: McGladrey, BLS

With the unemployment rate standing at 5.8 percent, those gains have created the conditions for wages to begin to increase.  Average hourly earnings are currently rising at a 2 percent pace on a year-ago basis while wages and salaries of private sector workers are rising at a 2.3 percent pace. We anticipate that average hourly earnings will increase to 2.5 percent by the end of next year, perhaps even sooner, thus potentially approaching 3 percent. While wage gains won't likely match the 4.5 percent seen in past cycles thanks to broad demographic headwinds, this should still bolster the confidence of large and middle market firms enough to begin boosting capital expenditures, a key missing ingredient in the economic mix. That will help boost productivity and living standards, both of which have fallen in recent years.

The composition of job creation last month was primarily clustered in low-wage subsectors. There were about 167,000 low-wage jobs created versus 145,000 high-wage jobs. But this was expected due to traditional seasonal hiring that is typically clustered in retail trade and temporary workers. Even so, the six-month diffusion index jumped to 75.8 from 72.9, reflecting a broadening of hiring across the different sectors of the economy.

If one was looking for an early holiday economics present, this report was it. The employment data during the past several months bodes well for not only the financial economy but the real economy.


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