Stocks Love Lack Of Wage Growth

Inflation Feared Less

There was so much information in the February labor report, it needs a few articles to get through each data point and explain what each indicator means. The stock market rallied because there was jobs growth, but not much wage growth. In the previous few years of this expansion, the market wanted wage growth because it meant the consumer would have more disposable income. Now that the Fed is more hawkish, wage growth is bad because it signals inflation is picking up which can cause more rate hikes. It’s all about whether the market fears a recession or inflation more. Ultimately, inflation causes a recession, but it occurs in a different order than a double dip recession.

Wage Growth Missed Estimates

Average hourly earnings were up only 0.1% month over month. This missed estimates for 0.2% growth and was down from last month’s report of 0.3% growth. On a year over year basis, hourly earnings were up 2.6% which missed estimates for 2.9% growth. The prior month’s growth rate was revised down from 2.9% to 2.8%. The market had a huge reaction to the average hourly earnings growth last month as the 10 year bond yield increased quickly and stocks fell. Investors thought the economy was going through a phase change where inflation was going to explode. Inflation will pick up from last year, but there is no need to panic. I think the Fed will raise rates 3 times and the economy will be relatively stable. The Fed will be hawkish in 2019. How hawkish it gets will depend on inflation. Therefore, the market’s panic was about a year early. I’m not saying stocks will crash next year, but the wage growth issue will be real at that point.

Weekly Earnings Are Important

One other point worth noting is the average work week increased from 34.4 hours to 34.5 hours. This beat the estimate for 34.4 hours. Often times the work week and the hourly earnings rate affect each other. When the work week shortens, wage growth is fast and when the work week lengthens, wage growth is slow. That’s why weekly earnings are important to follow. Weekly earnings growth was 2.9% year over year. On a month over month basis, weekly earnings growth was 0.44%. As you can see, those results are better than the hourly results because the work week got longer. This data makes the result less shocking.

Service Jobs Expanding Faster Than Manufacturing Jobs

The chart below does a great job of summarizing the wage growth in the service sector and the total private service jobs. As you can see, the wage growth barely existed in 2008 and 2009 as the total number of service jobs declined. Since then, the number of jobs and the wages increased. In February, there were 105.3 million service jobs which had an average hourly wage of $22.12. That’s an increase of 187,000 jobs and 4 cents from last month. Private service jobs paid less than the average hourly wage which was $26.75. The service growth has been steady while manufacturing has been volatile. Whenever the manufacturing jobs were lost this cycle, services took market share. This is important because it means manufacturing weakness means less to the economy each cycle. In February, 31,000 manufacturing jobs were added which beat the estimate for 17,000. It was below last month’s gain of 25,000 which was revised higher by 10,000.

Oil Jobs Market Update

There is a narrative that the U.S. economy is more reliant on oil this cycle than in the past because America has become the largest producer in the world. Therefore, the assumption is made that the U.S. economy wouldn’t be hurt as much as it normally would if oil prices went up. Obviously, some sectors would be hurt as costs would increase. The consumer would also lose real disposable income. However, the employees of oil companies would benefit. Essentially, the thesis is that the American economy has become more diversified which is a good thing. If inflation picks up, some areas will benefit much more than they did in 2008. The 4 charts below show the total jobs in the industries within the oil and gas sector. Let’s see how accurate the ‘American labor market diversification’ thesis is.

First, let’s look at the oil and gas extraction industry. This chart is the most surprising because the industry has barely added any new jobs since the crash in the oil market from 2014-2016. This is probably because firms are getting more efficient at drilling. There were also a lot of drilled, but uncompleted wells which are being worked off now. That could mean less workers are needed to increase oil production. If that’s the reason, the jobs will be regained. If they aren’t regained, it’s a hit to the narrative that the energy market is more important to the U.S. economy in this cycle because the number of jobs is about the same as before the last recession. The total will probably increase this year if oil stays above $60. The good news is these jobs pay really well as the average hourly wage is $34.68. There has been decent growth in the past 10 years as the wage was $25.14 in January 2008.

The chart showing support activities employment in oil and gas operations is as expected because it mimics the price of oil in the past few years. There are about 50,000 more jobs now than before the last recession. It would be great for the labor market if this industry adds 80,000 more jobs and gets back to the 2014 peak of 337,000 jobs. These jobs aren’t as well paying as the extraction segment as the average hourly pay is $27.52 which is near the average for the overall economy.

The oil and gas pipeline sector has the most stable job total because pipelines shouldn’t be affected by the vacillations in the price of oil. There are about 30,000 more jobs now than before the last recession. The total is about 15,000 off the peak in 2017. These jobs are also really well paying as the average wage is $31.67 per hour.

The mining and field machinery industry is like the services industry in that it has been increasing off the lows made when oil bottomed. It has only a few thousand more jobs than before the last recession.

The thesis that the labor market is more reliant on the oil and gas sector this cycle could be true if the jobs return to the peak 2014 levels. However, the fact that the extraction jobs haven’t come back yet even as oil prices have recovered means this narrative is mostly false for now.

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