U.S. employment and income: wages strong but total compensation lags.

Size: px

Start display at page:

Download "U.S. employment and income: wages strong but total compensation lags."

Sheena Ramsey
5 years ago
Views:

United States of America Analysis Report February 7, 2018 Contacts Felix Boni Chief Credit Officer felix.boni@hrratings.com Jordy Juvera Economics Associate jordy.juvera@hrratings.

1 United States of America Analysis Report February 7, 2018 Contacts Felix Boni Chief Credit Officer Jordy Juvera Economics Associate Cynthia Pérez Economics Analyst HR Ratings comments on strong January employment but notes that total compensation is not necessarily keeping pace with wages. The January payroll report was certainly positive; however, it is probably important to examine its various elements as well as other related reports in order to obtain a more comprehensive picture of the employment situation and its potential impact on inflation. We do expect there will be an impact. However, it is important to consider that inflation by some measures has already been accelerating since mid-year Although real wage growth 1 was strong in January, the year over year annual increase for the quarter was 1.01%, substantially unchanged from the 1.0% observed in the quarter ending in October. On an annualized basis, wages on real terms increased 0.34% in the January quarter vs. the stronger 0.42% advance in October. Wages were additionally supported by an annual increase in the average number of hours worked of 0.19%. We estimate that the combination of a 1.48% increase in payrolls, the mentioned rise in real hourly wages and the increase in average hours worked represented a strong increase of 2.71% in total wages paid vs. the October quarter.. Non-Farm Payroll, Employment and Earnings Report Jan-17 Oct-17 New Payrolls in month New Payrolls 3mma Total Payrolls 145, , ,810 Annualized quarterly change in payrolls 1.55% 1.45% 1.57% Annual quarterly change in payrolls 1.69% 1.48% 1.48% Unemployment Rate (3mma) Labor Participation Rate (3mma) Quarterly average nominal hourly earnings Annualized quarterly change real hourly earnings* -0.98% 0.42% 0.34% Annual quarterly change real hourly earnings 0.76% 1.00% 1.01% Annual quarterly change hours worked -0.58% 0.00% 0.19% Source: HR Ratings w ith data from the US BLS & FRED. Payroll numbers in thousands and seasonally adjusted. *Annualized change vs. immediately prior quarter incorporating HR Ratings estimate for headline PCE inflation. In terms of payrolls, the annual rate of increase has been gradually declining for approximately three years. The January report as seen in Graph 1 does not suggest any significant changes in that trend. 1 Our analysis is based on real wage growth and uses the headline PCE measure as the basis for deflating the data. For January we incorporate an estimate for that month s inflation in order to adjust the January nominal data. Finally, our analysis is largely based on three month (m/m) moving averages in order to avoid the noise that can be created by month-to-month volatility. For January we assume that m/m inflation will reach 0.22%. Hoja 1 de 8

2 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jul-14 Jan-15 Jul-15 Jul-16 Jan-17 Jul-17 Jan-12 Jul-12 Jan-13 Jul-13 Jul-14 Jan-15 Jul-15 Jul-16 Jan-17 Jul-17 Graph 1: Annual change in total payrolls 2.25% 2.10% Annual Quarterly change in Payrolls Annual LTM change in Payrolls 1.95% 1.80% 1.65% 1.50% 1.35% 1.20% Source: HR Ratings based on data from the BLS and FRED. Seasonally adjusted data. In Graph 2 we show the evolution of real wages in terms of their annual quarterly growth. The data for January suggest further increases in the rate of growth are possible. However, the growth rates do not seem to suggest any post-recession breakthrough. At least the downward trend through February 2017 has been reversed. Graph 2: Annual quarterly change in real hourly earnings of all private sector employees (PCE) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% (0.5%) (1.0%) Source: HR Ratings with data from the BLS and FRED, based on seasonally adjusted 3MMA data using PCE headline inflation basis. Incorporates HR Ratings estimate for January PCE inflation. From our perspective, a relevant number is not only the increase in wages but the combination of the increase in wages with the rate of growth of new. The two together give us an idea as to the total increase in demand that could come from the labor market: Thus, the relevance of the 2.71% figure previously mentioned Hoja 2 de 8

3 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Graph 3 presents the evolution of the unemployment rate which is currently at 4.1%, in historical terms, at least, suggests that further downward movement will be difficult. Demand pressures for further reductions in all likelihood will generate accelerating inflation unless there is a reduction in the labor participation rate which would increase the supply side of the labor equation. For that to have this theoretical impact, however, the new entrants into the labor force would have to have the skills and aptitude relevant for available jobs. For its part, the participation rate appears to be stable at a relatively low 62.7%. Graph 3: Unemployment and Labor Participation Rate (3MMA) Unemployment rate Labor Participation rate Source: HR Ratings with seasonally adjusted data from the US BLS and FRED. As we previously mentioned, in terms of analyzing the possible inflationary impact of rising wages it is necessary to combine these with hours worked, and more importantly, the number of individuals working. Additionally, it is also important to incorporate non-wage benefits. When we do this the robustness of the labor earnings is not as positive. In Graph 4 we present the evolution of various indices of wages and total earnings, all adjusted for PCE inflation. We have constructed these indices based on the data included in different reports: Employment and Personal Income reports. The index derived from the former is elaborated by calculating the change in real wages, total employment and hours worked. Hoja 3 de 8

4 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Graph 4: Indices of Wages and Total Compensation (3MMA) Wages based on Employment report Wages based on Pesonal income report Total Compensation Personal Icome Report 98 Source: HR Ratings with data from the US BLS. Index elaborated by HR Ratings and expressed in real terms on a PCE headline basis. Base: January However, in order to facilitate comparisons, we also constructed comparable indices for total compensation and wages. All three indices are presented on a three-month moving average basis. The difference between the two Personal Income based reports is that total compensation includes non-wage worker benefits. The indices are derived from the nominal term numbers in the report which we have deflated on the basis of PCE inflation. The index comparison shows that the three-data series roughly parallel each other. However, for a period of time, the Personal Income based income data had a superior performance to wage income in the employment report. Significantly, this difference began to disappear and by the end of 2016 the two had converged. Note that over the last few months of 2017 the behavior of the employment-based index begins slightly to diverge from the personal income metric, suffering a decline in September and then rebounding to close more strongly by December. The quarterly number for January actually experienced a decline vs. the 2017 year close. This is because even though our PCE inflation assumption returns a 0.12% rise in hourly real wages the 0.58% decline in hours worked (from 35.5 to 34.3) more than offsets it. We assume that hours worked will shortly rebound while wage growth will remain solid. However, beyond the roughly similar movements in the wage indices the evolution of total compensation is noteworthy especially since late 2016, showing notably weaker growth. The reason is the weak growth in non-wage benefits. This presumably will serve as drag, to some degree or another, on consumer spending. At the aggregate level, at least the data suggest that employers are paying higher wages but compensating for this by restricting benefits. Furthermore, on an annualized basis total compensation growth appears to be declining not accelerating. In Graph 5 we show the evolution of the same indices in terms of their quarterly annual growth. Annual growth levels are now reaching comparable levels after a little more than a year in which the employment-based metric turned in significantly stronger increases. Hoja 4 de 8

5 Apr-13 Jul-13 Oct-13 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Graph 5: Annual Quarterly Change in Index of Wages and Total Compensation 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Wage Index based on Employment report Wage Index based on Pesonal income report Total Compensation Index Pesonal Income Report Source: HR Ratings with data from the US BLS. Index elaborated by HR Ratings and expressed in real terms on a PCE headline basis. January 2012 = 100. There is finally the question of inflation. In Graph 6 we show inflation on a quarterly annualized basis measuring the change in prices versus immediately prior quarter. Graph 6 shows that inflation, using this metric, has been accelerating in recent months, before the recent January employment report, with the headline measures (CPI and PCE) at or very near 2% since September (CPI) or October (PCE). Core inflation is also accelerating noticeably. 2 It is important to point out that annual inflation, as presented in Graph 7, is not running at 2.0% on any of these metrics. Furthermore, annual inflation currently is lower, or not significantly higher than it was in earlier months of On its face, this would suggest that pressures on the FED of raising interest rates are not as great as one would expect, or at least mixed 3. The concern, of course, is that on an annualized basis inflation is accelerating rapidly and the information on employments suggests that this will continue. Still, it is important to remember that total compensation is not rising at rates as strong as those for wages alone. The implication of this for inflationary pressures needs to be evaluated. 2 The January observations for both headline indicators represent HR Ratings assumptions in order to finalize the wage growth model. 3 At least from inflation. The FED is probably concerned about asset bubbles derived from long periods of low interest rates and the need to have positive real rates that can be lowered in the event of a recession. Hoja 5 de 8

6 dic.-13 mar.-14 jun.-14 sep.-14 dic.-14 mar.-15 jun.-15 sep.-15 dic.-15 mar.-16 jun.-16 sep.-16 dic.-16 mar.-17 jun.-17 sep.-17 dic.-17 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Graph 6: Annualized U.S. Inflation 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% CPI Total CPI Subyacente PCE Total PCE Subyacente -3.5% Source: HR Ratings forecasts with data from the US Bureau of Labor Statistics. Graph 7: Annual U.S. Inflation 3.0% 2.5% CPI Total CPI Subyacente PCE Total PCE Subyacente 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Source: HR Ratings forecasts with data from the US Bureau of Labor Statistics. Hoja 6 de 8

7 HR Ratings Senior Management Management Chairman of the Board Vice- President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Chief Operating Officer Felix Boni Álvaro Rangel Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com Corporates / ABS Methodologies Luis Quintero Alfonso Sales luis.quintero@hrratings.com alfonso.sales@hrratings.com José Luis Cano joseluis.cano@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Hoja 7 de 8

8 Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) HR Ratings de México, S.A. de C.V. (HR Ratings), is a Credit Rating Agency authorized by the National Banking and Securities Commission (CNBV), registered by the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for the assets of public finance, corporates and financial institutions as described in clause (v) of section 3 (a) (62) (A) of the US Securities Exchange Act of 1934 and certified as Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). HR Ratings de México SA de CV (HR Ratings) ratings and/or opinions are opinions of credit quality and/or regarding the ability of management to administer assets; or opinions regarding the efficacy of activities to meet the nature or purpose of the business on the part of issuers, other entities or sectors, and are based exclusively on the characteristics of the entity, issuer or operation, independent of any activity or business that exists between HR Ratings and the entity or issuer. The ratings and/or opinions assigned are issued on behalf of HR Ratings, not of its management or technical staff, and do not constitute an investment recommendation to buy, sell, or hold any instrument nor to perform any business, investment or other operation. The assigned ratings and/or opinions issued may be subject to updates at any time, in accordance with HR Ratings methodologies. FORWARD-LOOKING STATEMENTS Certain statements included in this presentation may include forward-looking statements. These statements are not historical facts, but instead represent only HR Ratings beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the HR Ratings control. It is possible that HR Ratings actual economic projections and financial conditions may differ, possibly materially, from the anticipated results and financial conditions indicated in these forwardlooking statements. NO DUTY TO UPDATE HR Ratings assumes no obligation to update any information or forward-looking statement contained herein, save for any information required to be disclosed by law. Hoja 8 de 8

Advance retail sales in June

Advance retail sales in June Contacts Felix Boni Chief Credit Officer felix.boni@hrratings.com Jordy Juvera Economics Associate jordy.juvera@hrratings.com Cynthia Pérez Economics Analyst cynthia.perez@hrratings.com HR Ratings comments