MNI ANALYSIS: Don't Turn The Page On Wages Yet

--Headline Earnings Impacted By Supervisory Wages In Jan and Feb

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - Wage inflation has been closely watched this year, as

markets volley between concerns of it being too soft and too hot. In January,

the markets reacted volatilely to the strong 0.3% gain in average hourly

earnings, AHE, causing fear of overheating wage inflation. February's print

tamed those fears with the soft 0.1% rise, but markets shouldn't assume rising

wage inflation is over, as underlying strength in the data is being overlooked.

--MARKET REACTIONS AND FED EXPECTATIONS

     After the initial sell off of equities, the Dow closed on a 440 point surge

on Friday, on what markets would eventually deem a "perfect" payrolls report.

Choosing not to look a gift horse in the mouth, markets accepted large payroll

gains and soft wage inflation as a sign of a healthy, but not inflamed economy.

     This came a week after Federal Reserve Chairman Jerome Powell testified to

the Senate that the Fed had yet to see a decisive move up in wages. However,

markets, already tense from from the longest streak of 0.3% m/m AHE since the

series start in 2006, worried that another strong gain in February would alter

Fed thinking. So Friday's downside surprise in AHE eased concerns that prior

months' gains were indicative of a shifting trend in wage inflation.

--TAX CUTS HAD NARROW EFFECT

     The reports for December and January each saw 0.3% spikes in AHE, largely

driven by the announcement and passage of tax cuts. With many companies

announcing one-time bonuses to workers, it is understandable to expect an

increase in income. However, the Bureau of Labor Statistics does not account for

one-time bonuses in its calculations for AHE, instead only accounting for

raises.

     With less information circulating on actual wage increases and to whom

these raises would be given, the direct impact of tax reform on AHE becomes

harder to gauge. In fact, when excluding supervisory workers, there was a much

softer 0.1% increase in January m/m AHE - begging the question where January's

large overall print came from.

     According to the BLS, production and nonsupervisory workers make up about

80% of private workers. With these workers only seeing a mild 0.1% increase, MNI

calculates that supervisory workers saw a 0.8% jump in their m/m AHE in the

January report, matching the gain in January of 2016, and making these the two

highest January gains for supervisory workers since the series start of private

average hourly earnings.

     Though markets initially worried that the tax cut was too strong of a

tailwind, it appears that most tax cuts effects were only realized by

upper-level employees. Through understanding the distribution of wage gains in

January, it then becomes clear that the 0.3% overall surge reflected large gains

for a smaller portion of workers and not a sign of underlying wage inflation nor

a sign of shifting wage pressures for the Fed.

--FEBRUARY WAGES STRONGER

     While segmenting supervisory from nonsupervisory pay shows that markets may

have overreacted to January's average hourly earnings jump, it also suggests

that February wage inflation may not be as soft as markets believe.

     February's 0.1% rise in AHE quelled market fears, but a closer look shows

that nonsupervisory workers experienced a 0.3% gain in AHE. This was the first

time since August that the majority nonsupervisory worker category experienced

higher wage gains than supervisors - and is more indicative of a mounting wage

pressure. The tight labor force has been attributed to the reported need for

highly-skilled workers, which should cause wages to continue to rise in

response.

     In this context, it becomes clear that February's tight labor market did

lead to climbing wages - a fact that was obscured by conglomerating wage gains

in supervisory and nonsupervisory workers.

     While a 25bp hike is already telegraphed for March's FOMC meeting, the 0.3%

AHE gain for nonsupervisory workers does suggest that the wages for this

category could be firming.

     However, market participants, looking at the overall 0.1% AHE, are

currently viewing a more hawkish Fed as slightly less likely and will be

watching this week's inflation data closely as the FOMC begins preparing to

forecast for their near and long-term interest rate projections.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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