Hourly Earnings Disappoint, but Continue to Surpass CPI

Earnings

The US created a net new 228k jobs in November, and the previous two months that were skewed by the weather showed a net upward revision of 3k. The hourly earnings data were disappointing. They rose 0.2% instead of 0.3% and the October series was revised to -0.1% from flat.  

Average hourly earnings rose 2.5% from a year ago. As this chart illustrates, for the third year running, average hourly earnings care rising faster the headline CPI.

There were two upside surprises in the today’s report. First, the work week unexpectedly ticked up to 34.5 hours from 34.4, which matches the high of the year and is a five-month high. A six-minute increase in the work week does not sound like much, but given the size of the labor market, it turns out to be significant in terms of output.

Second, manufacturing jobs jumped 31.k after 23k increase in October. This year’s average through October had been 14k. Last year, the US lost 1k manufacturing jobs on average a month. Ironically, the weakness in hourly earnings appears concentrated in manufacturing and utilities. The latter may still be storm-related.

Other details of the report were in line with expectations. Unemployment was flat at 4.1% and the participation rate was also unchanged at 62.7%. The underemployment rate (u-6) rose to 8.0%, but recall that it fell sharply (from 8.3% to 7.9%) in October.

Although the earnings growth disappointed, the market will not be deterred from expecting the Fed to still hike rates 25 bp next week. Headline inflation converges to core inflation and core inflation is understood to be driven by wage growth. The disappointing earnings growth can impact long-term interest rates through the inflation expectation function. Today’s report by itself is insufficient to stop the US curve from flattening further. If the Fed raises rates twice in H1 18, there is risk that the yield curve could invert from the current 58 bp difference between the 10 year and two-year yields.

The dollar was bid before the report and has pulled back in the aftermath. Resistance for the euro is seen in the $1.1780-$1.1800 area. Sterling found a bid near $1.34, but the $1.3450 may be difficult to overcome. The dollar was turned back from JPY113.60. A break of JPY113.20 could see JPY112.80.