MNI INTERVIEW: US Labor Market Could Have Soft Landing-Paychex

Slowing wage growth amid continued employment gains suggests the U.S. job market is coming into better balance and the Federal Reserve could be nearing a soft landing as it works to conquer a bout of inflation that reached 40-year highs, Frank Fiorille, a vice president at the payroll firm Paychex, told MNI.

"What the Fed is doing is definitely affecting things and we're seeing that in the wage inflation and so while we really saw an acceleration over the year that growth is definitely slowing," he said in an interview.

The rate of hourly wage growth for U.S. small businesses continued to decline to 4.66% year-over-year in January according to the latest Paychex IHS Markit Small Business Employment Watch, the lowest since January last year. That comes as its jobs index measuring national employment growth for businesses with fewer than 50 workers increased for the first time since 2020, up 0.18% to 99.56.

"Right now a soft landing is a good way to characterize it but we'll see what happens here through the spring," he said, noting there are few signs that businesses are gearing up to shed workers. The Employment Cost Index also showed decelerating wage growth, up 1% in the fourth quarter following a 1.2% gain in prior three months.

"Jobs are good," he said. "We are seeing some signs wages are starting to come down and looking at our data we feel like things are definitely not as heated as they were." Wages were down in all sectors except leisure and hospitality that accelerated to 6.82% in January.

HOURS WORKED

The wage index also shows that employees of small businesses are increasing their hours worked to increase their earnings.

"We think the supply is now increasing and that could be driving some of the increase we saw this past month," said Fiorille, vice president of risk, compliance, and data analytics at Paychex. "Business is getting better and things are normalizing and they're asking employees to work more hours."

One-month annualized hourly earnings growth fell below three percent for the first time since 2020 to 2.88% in January and one-month annualized weekly hours worked growth was 1.56%, the highest level since mid-2020 and was positive for the fifth consecutive month.

Still, one-month annualized weekly earnings growth moved below 4% for the third time during the past four months, according to Paychex, which draws from payroll data of approximately 350,000 clients.

Fiorille said the data also shows the divergence in wage growth between job switchers and job stayers has started to close. "When people leave the job and go for another job, they're not getting as big increases as they have recently."

"The Fed is definitely making an impact," he said. The central bank is expected to lift its benchmark fed funds rate by a quarter point to a 4.5% to 4.75% target range Wednesday, and may give fresh clues on the path for policy. (See: MNI FED WATCH: Slowing To 25bp Pace And Debating Terminal Rate)

But Fiorille remained optimistic about small businesses and hiring. "One of the things that we keep saying is that these businesses are resilient and they're being creative on a number of fronts to try to get through things," he said. "There may be a little deterioration later this year but I don't see any cliff, anything that's really going to come in and disrupt things, unless there's some event that we all don't see."