Friday is jobs day in the United States, a top-three event on the economic calendar whether you are in Milwaukee, Moncton, or here in Mumbai. Headlines will focus on the unemployment rate and the change in non-farm payrolls because those numbers usually contain the most information. Usually. This month and for the foreseeable future, the more important story will be buried beneath the headlines.
We know the U.S. economy is on a roll. According to the Labor Department's survey of payrolls, employers have added more than 200,000 positions for 11 consecutive months. The unemployment rate in December was 5.6 per cent, the lowest since June, 2008. Wall Street analysts expect more of the same Friday. Even if they are wrong, there will be no reason for panic. Dips are typical. It is the trend that matters.
The more important figure in Friday's report will be wages. American employers are hiring again, but they have been stingy with pay. Average weekly earnings were only 1.7 per cent higher at the end of 2014 than a year earlier. Stagnant pay means lacklustre demand. The American economy is doing well, but it won't reach its former glory until more people start to feel richer.
Janet Yellen, the head of the Federal Reserve, appears to think that moment is nigh. The Fed's policy committee last month released its most positive assessment of the economy since the recession in January. Of note, the committee said a series of indicators showed that the "underutilization of labour continues to diminish." Among those indicators is wages. The Fed's assessment implies it believes the economy is essentially operating as it always has: strong growth will lead to demand for workers, which will naturally put upward pressure on pay as employers seek to lure talent and retain current staff.
There is some debate about whether the Fed should assume the economy has healed itself.
"The Fed should not be fighting inflation until it sees the whites of its eyes," Lawrence Summers, the Harvard University professor and former Treasury secretary, said at the World Economic Forum in Davos. "That's a long way off."
Wages declined in December after posting one of the bigger monthly gains of 2014 in November. The drop is another reason to watch the figure closely Friday. A second poor showing will make it harder to dismiss that last reading as a fluke. If wages remain stagnant, the Fed likely will delay lifting its benchmark interest rate from zero.
The more likely scenario is that Ms. Yellen has it right. Traders and analysts reacted with dismay after last month's report. That could be because after so many years of disappointment, the financial markets have lost all ability to look on the bright side. Skepticism is a good thing. Knee-jerk pessimism is as blinding as the blind optimism that preceded the financial crisis.
RBC Capital Markets observed last week that while wages look stuck at present, several indicators suggest the outlook is getting better. The Employment Cost Index rose 2.33 per cent in the fourth quarter from a year earlier, compared with 2.26 per cent the previous quarter. RBC noted the National Federation of Independent Business's index of smaller business sentiment shows that 17 per cent plan to increase wages, the most since the end of the recession and a level that was consistent with annual wage gains of 2.5 per cent to 3.5 per cent during the last economic expansion. Surveys show that consumers themselves see their pay rising in the months ahead and their behaviour bares this out: the Labor Department's monthly report on job openings shows that workers are quitting their jobs at an accelerated rate. This is a positive development because it implies confidence in the labour market: one tends to leave a secure job only after he or she has lined up a better one.
The bottom line for RBC is that a "material" shift in wages is in the offing. With the unemployment rate in line with levels that historically imply full employment, the Fed will have little choice but to start raising interest rates, which still are at emergency levels. Wages will have to rise for a while to get the U.S. economy back to normal, but the emergency is over.
Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.