- Average hourly earnings only rose by $0.01 in February. But that's not necessarily a bad thing.
- Some economists have trumpeted fears of soaring wages leading to permanently higher inflation.
- Data signals the economy is still growing at a healthy pace, and that a wage-price spiral is unlikely.
Wages barely rose in February. That might not be as bad a thing as it sounds.
The February jobs report was, for the most part, hugely encouraging. Payroll creation trounced forecasts, and the unemployment rate fell more than expected. Yet the release also showed average hourly earnings swinging just $0.01 higher, showing only a 0.03% gain compared to the forecast for a 0.5% jump.
For the average American worker, the print can be concerning. Inflation has outpaced wage growth for the vast majority of Americans through the pandemic, leaving them with less buying power despite seeing historically large wage gains through the year. Data released Thursday offered little relief on the inflation front. The Consumer Price Index soared 7.9% in the year through February, accelerating again from January's pace and reflecting the fastest inflation since January 1982.
Yet the subpar wage growth could be a sign that the US will avoid another kind of economic crisis entirely. Various economists including former Treasury Secretary Larry Summers have repeatedly raised concerns of the country sliding into stagflation, a scenario in which the economy suffers from stagnant growth and high inflation. The US last faced stagflation in the 1970s, and it took historically high interest rates and significant economic pain to set the economy back on track.
With the Russia-Ukraine conflict already driving commodity prices higher and the economy no longer boosted by pandemic-era stimulus, it's possible a similar situation arises, Summers told Bloomberg on Friday.
"We're now facing real risks of a 1970s-type scenario," he said. "Not quite as high levels of inflation as we saw in the 1970s, but the same kind of broad phenomena of stagflation."
But the fast jobs growth and slowing wage growth from the February jobs report suggests that the US isn't facing this particular piece of economic peril at the moment.
Weak pay growth eases fears of a wage-price spiral
Job creation was the strongest since last July, and revisions to prior months show the labor market still healing quickly despite the Omicron wave powering record-high infection counts. Economic growth, at least according to the payrolls data, seems to be holding strong.
Other data support forecasts for healthy first-quarter growth. Retail sales boomed 3.8% to record highs in January despite the Omicron wave hitting its peak and inflation running red-hot. The fact demand held up amid soaring prices signals economic growth will come in far stronger than previously forecasted, Wells Fargo economists Tim Quinlan and Shannon Seery said in a February note.
"Without this January bounce, first-quarter consumer spending was on track to come in very soft or even post a modest decline," the team said. "This better-than-expected report is a game-changer and will likely result in some upward revisions to first-quarter growth rates."
And while halted wage growth seems bleak, it signals the US is far from facing a dire wage-price spiral, which has historically been a situation where rising consumer prices spur pay raises, further reinforcing ongoing stagflation.
Such trends see inflation pinned at elevated levels as workers demand higher wages and businesses raise prices in kind. Wage-price spirals played major roles in fueling the stagflation of the 1970s.
Pay growth is still broadly very strong, with average hourly earnings still up 5.1% year-over-year. February's slowdown hints that pace is starting to fall back to earth and eases fears that soaring wages could spark a vicious inflationary cycle.
The strong pay gains made so far have also been mostly felt by low-income groups. That's done little to boost inflation compared to factors like strong demand, supply-chain strains, and commodity shortages, Rick Rieder, chief investment officer of global fixed income at BlackRock, said in a Friday note. It's also given low-earning groups a much-needed lift, as they're the ones hit hardest by rising prices, he added.
"Workers who had long been losing ground economically are now, finally, seeing real improvement," Rieder said.