NFP Review – Wage Pressures Become Apparent

Summary

• NFP was higher than expected and added to labour market overheating.
• Nominal wage growth accelerated further from the Fed’s inflation target.

Market Implications

• Markets are underpricing the risk of a June hike.

NFP Add to Labour Market Overheating

April nonfarm payrolls (NFP) at 253,000 exceeded expectations of 185,000. At the same time, the past two months’ NFP were revised down by 149,000, to 413,000. That is an average of 206,000 a month.

Employment growth remains on a downward path from the unsustainable highs of the pandemic, which were the result of unprecedented policy easing (Chart 1).

Nevertheless, the slowdown in labour demand has been insufficient to lessen labour market overheating. Unemployment fell 20bp to 3.2%, the lowest since 1955. The broader measure of unemployment, U6 (which includes unvoluntary part-time workers and workers marginally attached to the workforce), fell 10bp to 6.6%. This is the lowest level in the history of the series, i.e., since 1994.

In addition, participation did not increase, though it remained at the highest level since the pandemic and only about 0.75% below pre-pandemic highs.

Faster Nominal Wage Growth Reflects Overheating

In line with labour market tightness, wage pressures are starting to show. Average hourly earnings (AHE) growth accelerated by 20bp to 0.5% MoM, above consensus expectations of 0.3%. YoY growth accelerated to 4.3%, a level inconsistent with the Fed’s 2% inflation target.

This acceleration happened despite a continued decrease in overtime hours, which tends to depress average wages since overtime work is paid more. This suggests a strong underlying trend wage growth, in line with the acceleration of the median wage in March.

The decline in overtime, in turn, does not signal labour market weaknesses but rather normalization from the extreme labour shortages during the pandemic. For instance, full-time employment has been rising and voluntary part-time employment has been normalizing. Yet another instance of normalization is hours worked. At 34.4, they were unchanged from March and back to the 2017-19 average. 

But the key factor driving the nominal wage growth slowdown is disinflation. In real terms, real median wage growth has been accelerating since early-2022 (Chart 4).

Market Consequences

The NFP release had virtually no impact on market pricing of the June FOMC. It remains almost zero, possibly because markets focused on the large negative revisions of the past two months. Yet the big picture remains that of an overheated labour market where wage pressures are becoming harder to ignore.

The NFP print therefore added to my conviction of a 25bp hike in June, barring a debt ceiling crisis.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)