Update US Labour Market Dashboard

US Labour market is booming, but wage growth remains the missing link (for now?)

Next week, the US Federal Reserve will meet for its March FOMC meeting. Ahead of the meeting, we provide you with an update of our Labour Market Dashboard to summarize the latest developments in the US labour market. Since the previous meeting late in January, US economic data were mostly weaker than expected, pointing to a slowdown in growth. Labour market data however remained surprisingly strong.

Both the January and February payrolls report surprised friend and foe. In January, the positive surprise was mainly based in the revisions, while in February payrolls growth picked up to 295 000. Also the unemployment rate extended its downward trend, falling to 5.5% in February and entering the Fed’s full employment rate target range between 5.6% and 5.2%. Despite excellent payrolls reports, which point to a flourishing labour market, there remains one missing link: wage growth! In January, average hourly earnings picked up by 0.5% M/M, supported by an increase in minimum wages, but wage growth slowed again to 0.2% M/M in February. Annually, wage are up by 2.0% Y/Y, well below the 3.5% Y/Y the Fed envisages. If the current pace of payrolls growth continues however, we it might only take months before wages will start to pick up. Besides the payrolls, we received also two JOLTS reports since the previous FOMC meeting. After a strong December report, January JOLTS data were more mixed with especially the hires rate disappointing.

A quick look at the table below shows that the latest developments in our Labour Market Dashboard were positive. Five out of our ten indicators improved further compared with the previous month (green arrows), while three indicators weakened (red) and two stabilized (yellow). Three indicators have met our self‐defined target, the same number as in January.
Nevertheless, three others indicators, the unemployment rate, the job quits rate and job hires rate, are very close to our targets. If the labour market recovery continues at its current pace, we believe those indicators will reach their targets soon.

To conclude, since the January FOMC meeting the US labour data improved significantly, indicating that the US labour market is booming. The unemployment rate has entered the Fed’s the NAIRU range, but wage growth still is the missing link. We believe however the Fed won’t wait for wages to pick up before taking a further step towards policy normalization.