Cha-Ching! U.S. Wage Growth Hits Post-Recession High

01/12/17 08:54AM EST

Cha-Ching! U.S. Wage Growth Hits Post-Recession High - money money

After years of stagnation, worried Rust Belt Trump voters are finally getting the bump up in their pay stubs for which they've long yearned. More is coming. None of this has anything to do with Trump and everything to do with the U.S. economic cycle. Here's why.

Wage growth is finally breaking out. Average hourly earnings growth hit a post-recession high last Friday, of +2.9% year-over-year. This should come as no surprise to anyone really (and to the relief of Federal Reserve officials, who have been hoping for wage gains to justify further rate hikes). The dynamics are fairly simple. Ask yourself this simple question (below is our answer):

Q: What happens when the pool of available labor shrinks to new lows in both absolute and relative terms?


A: Employment growth slows because you can’t hire fast enough (i.e. the easy gains have been made) and wage growth accelerates because the negotiating dynamics shift from a buyers to a sellers’ market.

Let's run through the numbers.

Demand for Workers , Supply = Wages 

#JobsGrowth #NFP 

It's not entirely complicated.

"The typical progression of slowing employment growth and accelerating wage growth should make a ton of sense for anyone with some familiarity of ninth grade macroeconomics," writes Hedgeye Senior Macro analyst Darius Dale in today's Early Look.

As you can see in the Chart of the Day below, the ratio of available labor to job openings fell to 2.4 in November from 2.5 in the prior month. Jobs growth on a year-over-year basis continues to slow to +1.51%, down -77 basis points from its February 2015 peak of +2.28%.

Cha-Ching! U.S. Wage Growth Hits Post-Recession High - Chart of the Day 1 12 17

Wages  = Consumption 

#Wages #Earnings #Consumption #GDP

Wage gains will continue to filter down into consumption and provide further support to our view that the U.S. economy is accelerating. Consumption growth continues to track the broader economy and suggest that both have bottomed out and are now re-accelerating:

  • Real Consumption Growth (year-over-year): peak 3.64% (March 2015) to bottom 2.37% (March 2016) to re-acceleration 2.78% (September 2016)
  • U.S. GDP Growth (year-over-year): peak 3.3% (March 2015) to bottom 1.3% (June 2016) to re-acceleration of 1.7% (September 2016)

This relationship isn't altogether shocking since U.S. Consumption makes up 70% of GDP. Prior to this, the U.S. economy had been relying on revolving credit to fill in for slowing wage growth and help backstop consumption. With both now rising, the U.S. economy is poised to grow.

Bottom Line

Rust Belt voters may finally get the relief they so desperately deserve after a protracted recession in the industrial side of the economy. Don't praise Trump. Simply put, the U.S. economy is accelerating once again. 

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