The US Government Bureau of Labor Statistics (BLS) released its June 2018 report on employment and wages last week. Among other things, it showed that wages increased at a faster pace than they have in several years. Overall, non-farm wages increased 2.7% year over year in June, which is faster than several years in the 1’s and low 2’s. However, wages increased in some industries faster than they did in others.
Here is a link to the BLS table that shows the raw data. Here is a link to an Excel spreadsheet that I created using the BLS data that shows the percentage increase by labor sector:
My Excel spreadsheet shows that the wage increases were labor sector-dependent. Wages in the Financial sector were up 4.63% and wages in the Leisure and Hospitality sector (Vegas, Baby!) were up 3.37%. However, if you work in Non-Durable Goods Manufacturing, your wages rose only 1.19%. It is not unusual for wages to rise at different rates in different sectors of the labor market. The news is that the average increase of 2.7% is higher than it has been in several years.
Rise in Prices?
It’s one thing if wages are rising. It’s another thing if companies raise their prices to customers in order to offset the rise in wages. According to this Wall Street Journal article, as with the rise in wages, the ability of companies and industry sectors to raise prices varies from sector to sector. The article says discount retailers and fast food restaurants have not yet been able to raise prices to offset the increase in wages. The Leisure and Hospitality sector has been particularly squeezed: it has not yet been able to recoup that 3.37% increase in wages. Prices for your hotel room may be heading up in the future, but the data shows that they haven’t yet.
Another Part of the Story
The Industrial sector, including all goods-producing sectors, actually had some of the lowest wage growth. However, the Industrial sector has other headwinds, including higher raw materials costs which are starting to be exacerbated by higher tariffs. Industrial companies are having a hard time raising wages while remaining profitable because their materials costs are increasing. So much for the Deflation theory. Something has to give, and I believe Industrials will have to raise retail prices, which will stoke overall inflation.
This whole scenario is why we are seeing higher interest rates (at least on the short end of the curve) and more stock market volatility. The labor market remains tight with no sign of loosening. Unemployment ticked up to 4.0% but that is still low. Former “non-participants” in the labor force are deciding now to participate (at least at the margins) because of the higher wages. I believe longer-term bonds (10 years and over) are over-bought currently, meaning that I believe their interest rates are too low and will have to rise. I believe core inflation will start to match the wage growth, in the mid-2% range. All of this is not the end of the world, and could actually be healthier for workers seeking higher wages. However, the stock market may not like it in the short term and so we will have more volatility ahead.