US economy

Stalled US wage growth adds to case for Fed restraint

Solid hiring by US employers failed to boost the annual rate of US wage growth in July, fuelling arguments for the Federal Reserve to tread carefully as it raises rates.

Employers added 157,000 jobs in the month, led by sectors including professional services and manufacturing. The headline hiring number was lower than Wall Street analysts had expected, but that left the monthly pace of job growth at a hearty 224,000 over the past three months, bolstered by revisions to earlier data.

Unemployment dropped to 3.9 per cent. A broader measure of labour market strength that includes people who are in part-time work but want a full-time position was just 7.5 per cent, a full point below where it was a year earlier and its lowest level since 2001.

Despite the robust figures, year-on-year wage growth flatlined at 2.7 per cent. The latest year-on-year reading for the consumer price index is 2.9 per cent, meaning that even as they report shortages of candidates, companies are increasing pay more slowly than the cost of living is rising.

The Fed is widely expected to move rates up by another quarter-point next month as it continues its gradual progress towards tighter policy.

Betsey Stevenson, an economist at the University of Michigan who previously served on Barack Obama’s Council of Economic Advisers, said the zero real wage growth in the data was puzzling. “We have to be running out of slack. That is why I am starting to be surprised,” she said.

She added that people could be seeing improvements in working conditions that were not manifest in headline wage figures, such as better working schedules. 

Explanations for the soft pace of wage growth vary widely. Economists cite lingering scars from the recession, residual slack in the labour market, low productivity growth, the decline of union membership, and the use of non-wage benefits among a host of potential explanations.

But the Fed, led by chairman Jay Powell, has been steadily lifting short-term interest rates in the belief that the tightening labour market will eventually stoke inflation. 

On Wednesday the central bank teed up a further rate rise in September, observing in its policy statement that “job gains have been strong, on average, in recent months, and the unemployment rate has stayed low”. It added: “Household spending and business fixed investment have grown strongly.” Annualised growth in real gross domestic product accelerated to 4.1 per cent in the second quarter. 

Hiring was widespread across a range of sectors in July, led by professional and business services, where headcounts were up 51,000 in July. Manufacturing added 37,000 jobs, suggesting President Donald Trump’s tariffs have not stymied hiring by US industry. Over the past 12 months, manufacturing has added 327,000 jobs.

The participation rate, which includes people actively looking for work as well as those in a job, held steady at 62.9 per cent. It has been hovering at similar levels for almost five years now, as the downward pressure from retiring baby boomers is countered by strong demand for labour pulling individuals off the sidelines and back into the jobs market. 

James Knightley, chief international economist at ING, said the headline payrolls number for July was “perhaps a little disappointing” but pointed out the US economy had been adding jobs at a quicker pace this year than in 2017.

“In terms of the outlook for employment, the fact that the economy is growing so strongly bodes well for ongoing job creation. There are certainly worries about protectionism and its potential economic impact, but we also have to remember that the stimulus from tax cuts dwarfs the tax hit from higher tariffs,” he noted.


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