BofA: Watch ‘Missing’ Wage Growth for Clues on Economy’s Strength

December 31, 2014

Wage gains will be key to sustaining U.S. growth this year after the economy was on track for 3 percent annual growth in the fourth quarter, a Wall Street analyst said.

“Slow wage growth has been the missing link in this recovery,” Ethan Harris, the head economist at Bank of America Merrill Lynch, said in a December 31 report. “We are hopeful this changes in 2015.”

Investors will get a first look at wage trends on January 9, when the Bureau of Labor Statistics reports jobs data for December. Economists estimate pay growth will slip to 0.2 percent from a preliminary reading of 0.4 percent in November.

“While this is still historically slow wage growth, we have seen tentative evidence of wages starting to accelerate,” Harris said. Average monthly wage growth of 0.25 percent would add up to a 3 percent annual gain by the end of 2015, he said.

Twenty-one states and Washington, D.C., are raising the minimum wage this year, while the federal rate is unchanged at $7.25 an hour, according to CNN Newswires.

The changes, which affect the wages of 3 million people, follow mass demonstrations by restaurant and retail workers.

“We’ve seen a historic number of states increasing their minimum wages,” David Cooper, an economist at the Economic Policy Institute, told the newswire. “People’s understanding of where the wage floor should be has changed a lot, and in part caused by strikes and protests.”

Economists on average forecast the December jobs report will show a drop in the unemployment rate by 0.1 percentage point to 5.7 percent, the lowest since mid-2008 before the global financial crisis. The consensus estimate for nonfarm payroll growth is 240,000, less than the six-month average of 258,000.