Many economists believe that the key issue to the US economy is wage growth rather than the employment rate. Sure, a low unemployment rate, now 3.8%, is the lowest unemployment rate we’ve seen since the early 2000’s. And sure, a net increase of 223,000 jobs this May 2018 reflects very healthy gains in the broad range of manufacturing and transportation industries as well as the retail and health services sectors.

But, wage growth is the most important part of the latest employment report. When people have more money in their pockets and savings accounts, if they have savings accounts, people feel more comfortable about spending that money on things like houses.

Average hourly earnings, in fact, did rise slightly to a y/y gain of 2.7% in May. This slight increase is not enough of an increase to make much of a dent but still, any increase in hourly earnings is better than none.

Diane Swonk, chief economist with Grant Thorton, thinks this ever so slight wage increase is the “great conundrum in our economic environment.” Why is wage growth so modest in the midst of a roaring economy and the longest stride of job growth on record?

Swonk thinks that a tighter labor market should prompt higher salaries so that employers can keep the workers they have and lure new workers. Right? Wrong. Swonk’s thinking is only theoretical. Slow increases in productivity, union membership declines and digital disruptions get in the way of Swonk’s thinking.

According to Torsten Olekl, chief international economist with Deutsche Bank, “This (wage growth) is the last shoe to drop in the labor market. It’s just a matter of time before wages start going up more strongly, but there’s frustration that it hasn’t happened yet, even though unemployment is the lowest it has been in 18 years.”

Some parts of the country have lower unemployment rates than 3.8%. Wisconsin, for example, is down from last year’s rate of 3.3% to 2.8% this year. Council Bluff, Iowa has an unemployment rate less than -3%.

And, in certain industries such as trucking, construction, energy, transportation and health care (hospitals specifically), wage growth is climbing. Some labor markets such as mechanics, electricians and other skilled trade workers are benefitting their workers with signing bonuses of +$20,000 and +$25/hour wages.

Pay attention, agents, to June’s employment report. If wage growth jumps up 3% from its current 2.7% rate, Aaron Kohl, foundation income strategist with BMO, speculates that inflation, interest rates and, yes, real estate sales volumes could start to edge higher because, according to Kohl, “that (wage growth) is the only number that matters really.”


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