U.S. Hourly Earnings Below 1.5% on Higher Labor Supply

American wages are rising at a sharply slower pace despite a rise in job gains, indicating deflationary pressures could force the Federal Reserve to delay an interest rate hike.
In last week’s employment report for February, the Bureau of Labor Statistics noted that average hourly earnings for private nonfarm payrolls rose 3 cents, or an annualized increase of 1.45%. While still positive, the growth is a sharp decline from a year ago, when hourly earnings were rising by as much as 2.5%.

American wages are rising at a sharply slower pace despite a rise in job gains, indicating deflationary pressures could force the Federal Reserve to delay an interest rate hike.
In last week’s employment report for February, the Bureau of Labor Statistics noted that average hourly earnings for private nonfarm payrolls rose 3 cents, or an annualized increase of 1.45%. While still positive, the growth is a sharp decline from a year ago, when hourly earnings were rising by as much as 2.5%.

Economists are particularly concerned that hourly earnings growth is falling while the unemployment rate is falling. These two trends usually correlate, and acceleration in earnings’ growth in 2012 and 2013 accompanied a falling unemployment rate.

Rising Short-Term Unemployment

More people continue to leave the workforce, as the employment-to-population ratio rose 8.5% year-over-year, indicating that less Americans are trying to work or are unable to find work.

At the same time, those marginally attached to the labor force have remained steady, at about 2.2 million people in total in February. Of those, 732,000 are discouraged workers, again little changed from the prior year. Discouraged workers are people of legal employment age who have given up looking for a job because they are unable to find work.

While long-term unemployed has fallen, the BLS reported a rise in short-term unemployed people, with people unemployed for less than 5 weeks rising 1.8% to 2.43 million. Long-term unemployed people still outnumber short-term unemployed, at 2.7 million people, or 31.1% of the total.

The trend of more short-term unemployed and a high number of discouraged workers continues even as the population of workers over 25 grows. Additionally, the number of people not currently in the workforce, but who want a job, has risen, up 2.3% for men and up 13.3% for women.

Bullish Inflation Expectations

With the increase in new jobs and a decline in the unemployment rate, inflation expectations have grown more bullish despite the decline in hourly earnings growth.
Ten-year U.S. Treasury yields rose by over 10% in the past month, again rising above 2% to 2.24%. The rise in the Treasury rate is due to an expectation of inflation rates to improve in the short term.  A potential rise in the short-term target rate from the Federal Reserve may be driving this as it broadly expects to occur in June of this year.

Some analysts interpret the trend as an expectation of broader spending in aggregate, but lower spending per capita, as individual incomes fail to rise at the rate of inflation. Others believe income gains are lagging behind employment gains, and incomes are likely to rise later in the year.