In April, renewed fears of sticky inflation led to a 50 basis points increase in 10-year Treasury yields and a 4.2% drop in the S&P 500 Index. Despite this, wage data has continued to moderate in 2024, with average hourly earnings decreasing to 3.9% in April, the lowest reading since mid-2021. The three-month annualized rate of change for average hourly earnings also fell to just 2.8%, indicating that wage gains are likely to moderate further in the future. As wages slow down to levels consistent with the Federal Reserve’s 2% inflation target, policymakers are not rushing to raise interest rates, despite the recent resurgence of inflation fears.
Traditionally, once wage growth accelerates to a high level, it tends to stay that way until a recession occurs. However, the current economic cycle appears to be unique. While wage gains have moderated to a more sustainable pace aligned with the Fed’s inflation target, they are still robust enough to support consumer spending. This balance in wages is crucial for sustaining economic expansion without triggering a wage-price spiral that would prompt tighter monetary policy, as labor income is the main driver of spending for most Americans.
The significant wage surge in 2021 was a key factor in the Fed’s aggressive rate hikes. However, the labor market today looks drastically different from early 2021, when a shortage of workers was a major issue. Since then, the labor force has grown by over 3 million workers, with labor supply benefiting from increased immigration. The Congressional Budget Office estimates a significant increase in net immigration over the past two years and anticipates further growth in the next three years, contributing to the pool of available workers and putting downward pressure on wage gains.
Changes in the demand side of the labor market have also helped rebalance it. Job openings surged in 2021 amid difficulties finding workers, leading to robust hiring. However, the pace of hiring has since slowed, and job openings are declining, indicating softer but still robust labor demand. Despite there being more job openings compared to pre-pandemic levels, the decline in job postings suggests that labor demand is weakening. As the labor market continues to rebalance and wages align with the Fed’s inflation target, policymakers can afford to remain patient, even amidst unfavorable inflation releases in 2024.
The rebalancing of the labor market is a positive development that enhances the likelihood of a soft landing. Jeffrey Schulze, CFA, Director and Head of Economic and Market Strategy at ClearBridge Investments, stresses that his predictions should not be taken as forecasts or investment advice. Past performance is not indicative of future returns, and neither ClearBridge Investments nor its information providers are liable for any damages or losses resulting from the use of this information. The current scenario of moderate wage growth, improving labor market balance, and subdued inflationary pressures bodes well for the continuation of the economic expansion with the potential for a smooth landing.