Job Growth, Wage Gains Mean Inflation Will Stay Sticky

The so-called Sahm rule, which signals the early innings of a recession, is triggered when the unemployment rate’s nearest-three-month moving average exceeds its lowest value from the past year by at least half a percentage point. That measure was unchanged from April, at 0.37 percentage point.

Even more promising for the economy, average hourly earnings were up 0.4% in May, and 4.1% on a year-over-year basis.

That kind of wage growth is a tough hurdle for the Fed, which is aiming to reduce the annual inflation rate to 2%. But it doesn’t put the central bank’s target out of reach, given the recently observed productivity growth. A 2% annual increase in output per worker, plus 2% annual inflation, result in wage growth at today’s level.

Rising wages are a more important driver of consumer spending than they were for most of the postpandemic boom, now that stimulus-driven savings have been whittled down and borrowing has become more expensive. “That makes any weakening in the jobs picture potentially that much worse [for consumer spending,] because the savings cushion just isn’t there anymore,” says Ben McMillan, chief investment officer at IDX Advisors.

While data suggest that American shoppers are losing steam, overall they are far from stressed. Credit-card charge-offs, savings rates, and sentiment-survey results paint a picture of belt-tightening at the margin, although mostly among lower-income consumers.

Supporting anecdotes abound from consumer-oriented companies.

AT&T

customers’ bad debt and delinquencies are low by historical standards, Chief Financial Officer Pascal Desroches told Barron’s last week. But customers are becoming more discerning in their spending, noted Desroches, who is also a director of the Federal Reserve Bank of Dallas.

Walmart

noted an increase in shopping by more-affluent consumers looking for bargains when it reported quarterly results last month.

McDonald
’s

and

Starbucks

cited slowing spending.

The Fed has a dual mandate: to ensure price stability and maximum employment. Officials are confident that today’s level of interest rates—the Fed has held its federal-funds rate at a target range of 5.25% to 5.5% since July 2023—are sufficient to achieve those objectives over time.

It would probably take the unemployment rate spiking above 4.5% to get the Fed worried about the economy. Conversely, the central bank would probably declare mission accomplished if inflation fell to a level consistent with 2.5% annual price growth, or less. There is a long way to go on both counts. Barron’s predicts no change in interest rates in 2024.

Markets are leaning dovish. Interest-rate futures pricing on Friday implied slightly more than one quarter-point decrease in the fed-funds rate this year, with a September cut roughly a coin flip.

The Federal Open Market Committee won’t change rates at its June meeting. Consumer-price-index data for May, to be released on Wednesday morning, will provide more insights into the inflation backdrop. Officials’ updated Summary of Economic Projections will offer a guide to where they see things going.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com