We can imagine two ways to interpret the softer wage signal from the Atlanta Fed’s Wage Tracker for January released yesterday. The first would be through the consensus lens, which should be applied if you are trying to get the immediate reaction (if any) right. And then there is my own lens, which would not guide the immediate reaction but might be relevant over time if there is something to it. Through the first lens it is good news. And through the second, it remains somewhat troubling, although arguably less so.
Let’s start with the consensus interpretation, which I would by no means disparage. The most obvious point to make in this context is that the downtick of most metrics within the tracker provides further confirmation of what we should already have expected. The strength of average hourly earnings growth in the January jobs report was due to a weather-driven distortion in the average workweek. On a 12-month basis, the Wage Tracker generally continues to slow, which is contrary to the (probably misleading) hook higher in average hourly earnings reported in the employment report.
Having said that, there is one minor anomaly here that I should mention even though it does not overturn the point raised immediately above. People disagree on what the main metric within the Wage Tracker is. I prefer the series weighted to current population characteristics, for reasons I need not get into here, except to say that my preference there is itself out of consensus. The 12-month rate there, which is reported at a 3-month moving average has been stuck at (a high) 5.2% for six months in a row now. But most of the other 12-month rates, including an unsmoothed version of a metric that is definitionally close to what I follow, ticked down. Indeed, the unsmoothed series fell from 5.4% in December to 4.7% in January, as indicated in the right panel of the chart below. Be sure to read the notes before the chart though, because the data are for the most part quarter end.
On balance, the data from the Wage Tracker is fully consistent with the Fed claim that the trend and outlook for wage growth are uncomplicated. Wage growth is now slightly too high, but it has been moderating and will probably continue to do so. Let’s keep it simple, by extrapolating, says the Fed leadership — in their public communication at least.
A reasonable observer with weak or no priors would say nominal wage growth is slowing
ECI is actual to December. Wage Tracker is actual to January. All data are monthly but expressed (and in the case of the ECI reported) at a quarterly frequency.
Where I am out of consensus — and therefore irrelevant to scoring the immediate market reaction (if any) — is on the notion that we really ought not get too excited by the fact that wage growth is less extremely elevated than it was. The run up of wage inflation earlier in this episode looks to have been primarily catch up to the surge of inflation, particularly in its most salient components, for reasons that originated almost entirely outside the labor market. And conversely on the way down. My hypothesis is that the failure of wage inflation to decelerate even more steeply might be evidence that the labor market is tight. Might be: I am not sure. But one bit of evidence related to that is that real wage growth, defined as the Wage Tracker less salient inflation, has been accelerating. Full disclosure: in the chart I use the smoothed version, which flatters my case. But you can adjust as you see fit.
I don’t know anybody else making this point. To a lot of folks it might seem like a rather pinheaded distinction. Dude, goods and services price inflation and wage growth are both decelerating. Don’t overthink it. On the other hand, the Fed is not easing. Maybe they are also overthinking it, which might be nice to know about. One advantage of this approach is that it does not lead to shock surprise when the Fed hesitates here. If that is the right take, then the implication is not that hawkish. It just reinforces that the Fed would prefer not to see a further tightening of the labor market and might prefer a slight easing. Six months ago, things did look more concerning.
Final point as an aside. I noticed during the last Press Conference that Jay Pow had trouble swallowing when asked about the seasonals in the CPI. Maybe that is also giving him some pause, pardon the pun. The news related to that will be interesting.
Salient inflation is actual to December and estimated to January. The Wage Tracker is actual to January.
