January 14, 2015
Goldman Sachs Group said U.S. wage growth is a “long way” from the Federal Reserve’s target rate, but isn’t as bad as recent data suggest.
Earnings of all private employers fell 0.2 percent in December from the prior month, the worst performance in the history of the data going back to 2006, according to the Department of Labor. Earnings of production and non-supervisory workers fell by 0.3 percent, the largest decline in 30 years.
“The trend on wage growth appears subdued,” Kris Dawsey, a Goldman Sachs analyst on the economics team led by Jan Hatzius, said in a January 13 report obtained by MoneyNews. “But there are reasons for optimism over the coming year.”
Fed Chair Janet Yellen and other central bank officials have cited wages as a key indicator of labor market slack and inflation trends. Workers’ earnings typically grow as the job market tightens.
Dawsey said the December wage numbers may turn out to be not as bad as reported this week, especially since negative data tend to get revised upward in final reports. That’s happened about 80 percent of the time going back to 1990.
Also, there are several calendar and seasonal effects that may disappear by the time the labor department reports January’s wage growth, which Goldman forecasts at 0.3 percent after revisions.
Workers expect their earnings to improve this year as the labor market tightens, but the annual pace of growth has “struggled to stay much above 2 percent in recent years,” according to Goldman.
“We do forecast wage growth to perk up a bit over the next year,” Dawsey said. “However, we have a long way to go before wages return to the 3 percent to 4 percent pace mentioned by Chair Yellen as consistent with a more normal labor market.”
While pay trends are subdued, consumers are expected to get some relief from declining gasoline prices.
“It’s not a marginal tax rate reduction, I’m just saying it has the same impact. People will have much more disposable income to spend on other goods and services, and the middle class needs that because they’ve not had big wage gains.”
The oil price drop will help corporate America too, Kudlow said. “Businesses need this. Manufacturing companies and retailers and everybody else, they all have fuel costs, they all have heating costs.”