Smallest U.S. Wage Increase on Record Muddies Pay Picture

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Will America Ever See Wage Growth Again?

Signs of a nascent pickup in U.S. worker pay proved fleeting as wages and salaries climbed in the second quarter at the slowest pace on record.

The 0.2 percent advance was the smallest in data going back to 1982 and followed a 0.7 percent increase in the first quarter, the Labor Department said Friday. In the 12 months ended June, wages and salaries were up 2.1 percent compared with a 2.6 percent year-over-year gain in the first quarter.

The yield on Treasury securities sank as the figures tempered expectations a firming job market would prompt the Federal Reserve to raise interest rates as early as September. While Chair Janet Yellen has said wages alone won’t determine policy, the unexpected slowdown means there will be even more riding on employment and growth data in coming months to bolster the case for tightening in the second half of the year.

For the Fed, the wage weakness “probably reduces your confidence a little bit that the inflation outlook is going to be picking up to target, and it could raise some questions about how much slack remains in the labor market,” said Laura Rosner, a U.S. economist at BNP Paribas in New York and a former New York Fed analyst. “The burden now falls on other economic data to remain really robust, and to support plans to start normalizing policy.”

The yield on the benchmark 10-year Treasury note dropped to 2.19 percent at 4:20 p.m. in New York from 2.26 percent late on Thursday as investors weighed what impact it would have on Fed policy.

Total Compensation

The Labor Department’s employment cost index, which tracks benefits in addition to wages, also rose 0.2 percent in the second quarter from the previous three months, falling short of the lowest estimate of 57 economists surveyed by Bloomberg. The median forecast projected a 0.6 percent increase.

The slowdown cut short what had been budding evidence worker pay was picking up as job openings climbed to the highest level in more than 14 years and the jobless rate edged toward the Fed’s definition of full employment. The year-to-year increase in wages in the first quarter at 2.6 percent was the strongest since the end of 2008.

The ECI data help color the outlook for worker pay after the June employment report showed average hourly earnings rose 2 percent from a year earlier, matching the average since the start of the expansion six years ago.

Because the ECI tracks the same job over time, it removes shifts in the mix of workers across industries, which is a shortcoming of the hourly earnings figures.

Some Caveats

There were enough caveats in Friday’s data to keep the debate on the outlook for wages heated. The slowdown in pay gains was particularly large among sales jobs, workers in the Northeast and those who received incentive pay such as bonuses, all categories that had shown outsized increases in the first quarter.

That suggests there is very little change in the underlying trend.

“Last quarter overstated the true trend in wage growth, and this quarter understated it,” Rosner said.

Excluding occupations receiving incentive pay, wages and salaries rose 2 percent in the second quarter compared with the same time last year, the same as in the first three months of the year.

“Incentive-paid workers decelerated quite a bit this quarter, and that was almost the entire explanation for the wage portion” of the slowdown, Wayne Shelly, a Labor Department economist, said in a telephone interview.

Consumer Confidence

The lack of momentum in pay is one reason consumer confidence has failed to build on gains earlier this year. The University of Michigan said Friday that its final sentiment index for July decreased to 93.1 from 96.1 the prior month.

Nonetheless, it’s held above 90 for eight straight months, the longest such period since a 17-month stretch ended in early 2005.

“Consumers still see the future income gains as their primary problem going forward,” Richard Curtin, director of the Michigan Survey of Consumers, said on a Bloomberg conference call. “This really remains a sore point for consumers and will continue to hold down the overall rate of growth in consumption.”

In a press conference following Fed policy makers’ June meeting, Yellen outlined her views on wages.

“We have not seen wage growth pick up,” she said. “We may not see wage growth pick up. I wouldn’t say either that that is a precondition to raising rates.”

Fed’s View

Fed officials this week signaled job-market gains were keeping them on a path to raise interest rates this year for the first time in almost a decade. That heightens the importance of employment reports over the next couple of months.

While the disappointing wage data doesn’t take a September rate increase off the table, it probably “leaves the Fed a little uncomfortable,” said Michelle Meyer, deputy head of U.S. economics at Bank of America Corp. in New York. If payroll growth comes in meaningfully below 200,000, it may be enough to persuade Fed policy makers to hold off until December.

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