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US wage growth shows tight labour market for Trump

January 6, 2017

US wage growth accelerated to the quickest pace since 2009 last month, underscoring rising inflationary pressure as President Barack Obama prepares to pass the torch to Donald Trump.

Average hourly earnings climbed 0.4 per cent in December from the previous month, beating expectations for a 0.3 per cent pick-up, the Labor Department said in the final employment report before the inauguration. The figure climbed 2.9 per cent from December 2015, marking the swiftest year-on-year growth since the financial crisis.

The jobless rate ticked up 0.1 percentage point to 4.7 per cent, matching forecasts. The reading highlights the significant strides America has made since the economic downturn that was ignited by the 2008 financial crisis, which pushed the unemployment rate as high as 10 per cent.

However, the rate of job growth disappointed in December. The biggest developed-market economy added 156,000 jobs, missing Wall Street expectations of 175,000. The November figure was revised higher to 204,000 from 178,000.

Yields on US government debt spiked after the report was released as concerns deepened in the bond market that the economy was headed towards a period of higher inflation for the first time since the financial crisis.

The Federal Reserve this week published minutes that showed several rate-setters believe that a quickening economy and the prospect of fiscal stimulus under a Trump administration could force them to raise interest rates more quickly.

“If the FOMC was anxious about potential increases in US fiscal spending that boosts growth and inflation, the payroll report will do little to lessen that anxiety,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.

Mr Trump, who will take office later this month, has suggested the headline employment figures are masking a structural shift, something that helped the businessman garner support among blue-collar workers in last year’s election.

To this point, the labour force participation rate, a gauge of the proportion of the working age population that has a job or is actively looking for one, came in at 62.7 per cent in December. While it has recovered since hitting a post-recession low of 62.4 per cent in 2015, it is well below its 66 per cent level ahead of the downturn.

If the FOMC was anxious about potential increases in US fiscal spending that boosts growth and inflation, the payroll report will do little to lessen that anxiety

A broader gauge of unemployment and underemployment has also failed to return to its pre-crisis levels. The so-called U6 rate was 9.2 per cent in December, the lowest since April 2008, but elevated compared with the 8.4 per cent level before the recession began in late 2007.

Mr Trump has vowed to unleash a vast infrastructure spending programme, cut taxes, loosen regulations and take measures aimed at bringing manufacturing jobs back from low production-cost countries, like Mexico, in a bid to kick-start further growth in the US economy.

The upswing in wage growth “is coming well before any fiscal stimulus hits, and underscores the unusual timing and therefore inflationary influence that a fiscal stimulus can have at this point in the business cycle,” said Alan Ruskin, an analyst at Deutsche Bank.

The yield on the policy-sensitive two-year Treasury, which moves in the opposite direction of the price, jumped on Friday morning by 3.6 basis points (0.036 percentage point) to 1.2 per cent, while the 10-year yield was up 4.4 bps to 2.39 per cent.

The US dollar, which has risen by more than 4 per cent since the election, climbed by 0.4 per cent against a basket of half a dozen currencies. US stocks were little changed, with the S&P 500 index falling by 0.1 per cent to 2,266.7.

Via FT