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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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The Case of the Wage Inflation Deception


Here we go again. It is clear that wage growth hasn’t been this high since 2009. But as Sherlock Holmes put it, “there is nothing more deceptive than an obvious fact.”



Certainly, year-over-year (yoy) average hourly earnings (AHE) growth has risen to a six-and-a-quarter-year high (blue line). But – as in the spring of 2014, when we first flagged this paradox, and a year or so later, when Fed Chairman Janet Yellen saw those “tentative signs of stronger wage growth” as a harbinger of inflation – it’s risen only because growth has fallen faster for aggregate hours, to a 20-month low (gold line) than for aggregate pay, to a four-month low (purple line) after both peaked nearly a year ago.

As we noted a year and a half ago, “while rising yoy AHE growth may seem like a good thing, in this case it is actually underpinned by cyclical downturns in the components that comprise it. … The bottom line is that the current rise in overall AHE growth is not a sign of strength. … It is risky to presume, based on AHE, that policy action has effectively achieved its goals of boosting inflation and healing the labor market.”

At the beginning of this year, following the acceleration in U.S. growth in 2014, we asked with regard to the Fed rate hike, “If not now, when?” It looks like – following an illusory uptick in AHE growth, along with a one month of “strong” nonfarm payroll jobs data that saw its yoy growth rate stay at an 11-month low, and yoy job growth according to the household survey fall to a 22-month low – the answer is December.

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