Is wage growth becoming a concern for the Fed?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed U.S. consumer prices and wages, key factors impacting U.S. small businesses and home sales in China.
U.S. consumer price gains slow, wage growth increases
Key U.S. inflation data from August, published 14 September by the Labor Department, painted a bit of a mixed picture, Ristuben said, noting that the consumer price index (CPI) rose by 5.3% on a year-over-year basis. “That’s a big number, but not quite as big as the 5.4% price gains seen during July and June,” he remarked. A similar trend was observed in the department’s core CPI - which strips out prices from the volatile food and energy sectors - with an increase of 4% on a year-over-year basis, Ristuben said. He noted that this rise was also lower than what was seen in June and July, and fell short of consensus expectations for a 4.2% increase.
“The screaming message here is that August’s numbers probably do not add to the concerns of investors who were worried about inflation based on numbers from earlier in the summer,” Ristuben stated, adding that he believes these price increases are still transitory in nature.
A more important watchpoint, especially as it pertains to the U.S. Federal Reserve (the Fed)’s timeline for tapering asset purchases and ultimately raising interest rates, is the Atlanta Fed’s wage growth tracker, Ristuben noted. He explained that the U.S. central bank isn’t usually too concerned about transitory inflation as long as wage growth isn’t accelerating alongside it - for the simple reason that if individuals aren’t earning more money, they won’t be able to keep spending more money, leading to an easing in price pressures. However, if wages continue to rise, then overall inflation can become sustained, Ristuben stated.
The latest numbers from the Atlanta Fed indicate that wage growth is continuing to pick up, he said, with August wages up 3.9%, based on a three-month moving average. With nearly 11 million job openings in the U.S., employers are boosting pay in order to attract more workers, he explained. “This 3.9% number is important, because a reading around 4% usually gets the Federal Reserve’s attention,” Ristuben said.
He explained that while he doesn’t think this number will alter the Fed’s tapering timeline for now, the situation bears close watching. “I still believe the Fed is likely to announce its tapering plans in early November, but this wage number could be something that pushes officials over the edge faster,” he stated. As for rate increases, Ristuben said he doesn’t expect any hikes until at least early 2023, with mid-2023 a more likely time for liftoff, in his view.
U.S. small-business sentiment survey shows concerns over staffing
The latest small-business sentiment survey from the National Federation of Independent Business (NFIB) shows that the record availability of job openings is weighing on U.S. small businesses, Ristuben remarked. As proof, he noted that 27% of respondents believe that the inability to find adequate staffing will become a serious issue for their business in the very near-term - with 18% of respondents reporting that it’s already a big problem.
“There are still roughly 5 million individuals who became unemployed in 2020 that haven’t returned to the workforce - and this could become an inhibitor to the pace of the nation’s economic recovery,” Ristuben said, noting that the recent expiration of federal unemployment benefits may change this. The September and October jobs reports will be key in determining the impact this has on fulfilling the record number of available positions, he said.
Half of respondents to the NFIB survey also indicated that supply-chain disruptions are impacting their business, Ristuben noted, making for a good news-bad news situation. The good news, he said, is that there’s high product demand, but the bad news is there’s not enough product to sell due to these disruptions. This, too, is also likely a factor in why the economy isn’t growing as fast as many had anticipated, he remarked. That said, Ristuben stressed that the latest U.S. economic data is still very good - and that both supply-chain and staffing issues will likely prove to be temporary.
Unpacking the recent decline in China home sales
Ristuben and Gilbert concluded this week’s instalment of Market Week in Review by unpacking recent economic data from China, including retail sales and home sales. The pace of growth in year-over-year Chinese retail sales slowed considerably during August, Ristuben said, falling to a rate of 2.5% - versus 8.5% in July. This step-down was probably due to China’s recent imposition of COVID-19 restrictions, he observed, noting that the country has a zero-tolerance policy when dealing with outbreaks of the virus.
Home sales by value, meanwhile, fell nearly 20% in China last month, Ristuben said - a drop that can’t be blamed on COVID. Rather, the decline in home sales can be attributed to government efforts to clamp down on the country’s shadow banking system by reducing the amount of credit the system can provide. “A lot of this credit had been used to purchase residential properties, and with less credit available, there are now less individuals who can attain the financing needed to buy a home,” he explained.
On the flip side, Ristuben said that the Chinese government is actively engaging in policies to encourage credit creation through official channels. “China has already cut its reserve requirement ratio for banks three times, and a cut in the lending rate probably isn’t off limits either,” he noted.
Overall, despite the disappointing data, Ristuben believes that the country is likely to experience a re-acceleration in economic growth in the months ahead. “Given what’s happening with global growth and within China itself, I think these current trends of deceleration are unlikely to continue for much longer,” he concluded.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.