Reassure the Fed and U.S. stocks: Wage growth appears to have peaked

U.S. wage growth appears to be peaking, an encouraging development for the Fed. Businesses are now becoming more cautious about spending after big pay raises over the past year, fearing that further big raises will eat into profits, according to recent surveys of HR firms, business owners and others. Economists expect the U.S. average hourly wage to hit an annualized rate of 5.2% in May, due next Friday, down from 5.5% in April.

Employers have so far successfully passed on higher labor costs to consumers, but this may be reaching a tipping point where higher prices dampen demand. That’s exactly what the Fed wants to see in its sweeping mission to rein in the worst U.S. inflation in 40 years.

Fed Chair Powell believes that a tighter job market could be one of the root causes of inflation problems, so cooling wage growth (and thus possibly inflation) would be welcome news for the Fed; as the Fed is walking a tightrope to rein in price pressures , while trying not to drag down the economy.

Jonas Prising, chief executive of human resources firm ManpowerGroup, said: “Wages have risen to levels that ‘employers can’t afford’. Businesses will think that my consumers and customers will not accept that I pass these costs on further, so we need to Start reducing costs.”

That mindset should encourage Fed policymakers, who hope that anchored inflation expectations will keep price pressures in check as they try to give the economy a soft landing. Their biggest worry is that inflation expectations are out of control , as in the wage-price spiral of the 1970s—consumers anticipate higher prices, demand higher wages, and ultimately force businesses to charge consumers more, in a vicious circle.

But slower wage growth is not in the minds of American workers, who will see their wage growth eaten up by inflation from food to gasoline to housing.

Bloomberg Economics Yelena Shulyatyeva and Eliza Winger said: “ If wage gains fall back, that raises the Fed’s odds of a soft landing for the U.S. economy . But that won’t stop the Fed from raising rates by 50 basis points in June and July; the Fed Zeng said that was its preferred path.”

U.S. stocks have slumped to their lowest level in more than a year on fears that the Fed’s 2% inflation target will lead to a recession. Therefore, the increased possibility of a soft landing in the U.S. economy is good news for investors.

Gad Levanon, chief economist at the Burning Glass Institute, said the U.S. is transitioning from a pandemic-driven job market to a traditionally tighter one due to low unemployment rates; during the pandemic, many Americans have been discouraged due to concerns about the virus and related issues. Actively look for work. Levanon pointed out that this may reduce wage increases to some extent, but wages could still increase rapidly. Levanon’s institute specializes in labor market research.

“Every company still needs people, but they don’t need hundreds,” said Tom Gimbel, chief executive of LaSalle Network, an employment agency in Chicago. “They’re more selective about who they hire than they were six months ago.”

Many companies, especially big ones like Ink Grill (CMG.US) and TJX Cos. (TJX.US). They still successfully pass on higher labor and material costs to customers . However, “some businesses added that higher prices are affecting sales,” the Fed said in the report.

This is especially true in smaller companies , which typically have lower profit margins and can only raise wages and benefits so much. They also tend to be concentrated in industries with a large proportion of low-skilled workers, where the wage pressure from the pandemic has been greatest. This is “the highest level a small company can do” against a backdrop of rising fuel and supply costs.

Spencer Hill, an economist at Goldman Sachs, said wage gains should slow to 4.5% by the end of the year, as temporary factors that boosted wages, such as one-off worker pay increases in response to the pandemic, are over. It would be somewhat closer to a growth rate of 3.5% to 4%, which he believes is in line with the Fed’s 2% inflation target.

“If wage growth partially falls back as temporary factors recede, the remainder of the Fed’s mandate will be more manageable,” the Hill report said.

This article is reprinted from: https://news.futunn.com/post/15948838?src=3&report_type=market&report_id=206814&futusource=news_headline_list
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