Look past the headline, it’s the earnings growth that’s important

The Federal Reserve has been pretty well set on the state of the jobs market for a number of months now. With payrolls growth of over 200,000 for every month since January 2014 apart from one (the surprisingly weak March reading that was subsequently revised even lower to 85,000), the Fed will be reasonably assured that jobs growth is on solid ground. Therefore as part of its dual mandate (covering inflation as well as unemployment), the main focus is coming on whether inflation is on the path towards 2% again. For this, the big takeaway from the report is the earnings growth, which is measured through the Average Hourly Earnings Growth.

earnings growthThe past three months have been encouraging on the average hourly earnings front. In each of March, April and May, the month on month reading has come in above the equivalent month of the previous year. That has meant that the year on year data has now been improving for the past three months. If the expectation of +0.2% for the month of June is hit then this would equal the +0.2% of June 2015 and would maintain the yearly earnings growth of +2.3%. subsequently, a strong reading of +0.3% on the month would continue the growth of recent months, whilst also breaking above the recent high of the past few years of 2.3% in December 2012.

av hrly earnings

However take this in conjunction with an unemployment growth that continues to fall (expected to come in at 5.4% (which would be a fifth consecutive month at 5.5% or below) and the spare capacity in the economy is falling. In Fed parlance the “underutilization of labor resources has diminished somewhat”.  If this is true then wage growth will start to filter through the system (as we have been gradually seeing in the past few months). This is what the Fed needs to start thinking seriously about raising rates. It is now July and although the Fed meeting at the end of the month will not include a rate hike, an earnings growth reading of +0.3% would show a fourth consecutive month of wages picking up. That would really make the FOMC think for the September meeting.

The headline Non-farm Payrolls data is expected to just dip slightly back to 233,000 from the strong 280,000 last month. However if the ADP Employment Report is anything to go by then we could be in for a decent number today. The ADP report showed a better than expected 238,000 which was a strong jump on last month’s 200,000. If this equates to a payrolls number above 250,000 then the dollar could have a strong reaction. (My guestimate is 246,000 for what it is worth).


However looking past the headline data and you will see what the Fed is really interested in from this report. Average hourly earnings does not get the same attention that the headline number does, but in terms of importance today, it could be everything.

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