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Categorized | Currencies

US wage growth slowest since 1982

Posted on July 31, 2015

397612 04: Rows of the new Series 2001 one dollar bill notes are stacked November 21, 2001 at the Bureau of Engraving and Printing in Washington, DC. The new dollar bills contain the signatures of U.S. Treasury Secretary Paul O''Neill and U.S. Treasurer Rosario Marin. (Photo by Alex Wong/Getty Images)©Getty

Expectations of a Federal Reserve rate rise in September took a knock on Friday when data showed quarterly US wage growth at its lowest level for more than three decades.

Wages and salaries for US workers rose by the smallest amount for a quarter since 1982, potentially clouding hopes of policymakers that the recovery is set to shift into a higher gear.

    The numbers from the Department of Labor, which showed a 0.2 per cent rise in employment costs versus the 0.6 per cent expected by Wall Street, comes as the debate about income inequality intensifies ahead of the presidential election next year.

    The figures sent the dollar and US government bond yields down sharply and put a dampener on expectations for a Federal Reserve rate rise following the Federal Open Market Committee’s carefully crafted statement on Wednesday.

    Instead of raising rates only when it had seen “further improvement” in jobs, the FOMC said on Wednesday it would do so when it had seen “some further improvement”.

    Joshua Shapiro, chief US economist with MFR, characterised the data as “not lift-off friendly”.

    “The dovish wing of the FOMC will look at this as another reason to be ultra cautious with the timing of lift-off,” he said. “It raises the bar in what kind of growth numbers that need to be seen between now and mid-September for the Fed to pull the trigger.”

    US presidential candidates across the political spectrum have pointed to income inequality and middle-class wages as one of the most pressing issues of the forthcoming election.

    Wage growth is also a key factor weighing on when the Federal Reserve will raise rates. While an acceleration in the rate of pay rises would suggest an earlier rise, a slowdown may push a rise back, although Fed chair Janet Yellen has signalled there will be a rise at some point this year.

    The unexpected slowdown in wage growth comes despite signs the labour market began tightening earlier this year and high-profile wage increases from large employers such as Walmart, Target and McDonald’s.

    Treasuries rallied on Friday morning in response to the labour market data, with buying focused on the shorter-dated portion of the yield curve, with the yield on the 3-year note sliding back below 1 per cent.

    The yield on the 10-year Treasury, which moves inversely to its price, fell 5 basis points to 2.21 per cent, while that on the five-year note dropped 7 basis points to 1.55 per cent.

    The dollar also took a hit, falling 0.27 per cent against the yen at Y123.79, having been on a high note immediately before the numbers came out.

    Eric Green, a strategist with TD Securities, said the data would not be constructive for the Fed as it debates lifting interest rates for the first time in nearly a decade.

    However, despite the “dismal” figures, he added the odds of a rate rise in September were still above 50 per cent.

    “Labour market fundamentals are improving, job openings at record highs, and slack on a steady downtrend. This is precisely how the Fed will interpret this report, even if the numbers here are atrocious,” he said in a note.

    The figure, the smallest gain since the labour department began publishing the series in the 1980s, followed a 0.7 per cent advance in the first quarter of 2015.

    Gross domestic product climbed 2.3 per cent in the three months to June, according to figures released on Thursday, slightly below predictions for 2.5 per cent growth.