U.S. Jobs: Meaningful Wage Growth Is Here, Will Inflation Come Next?

It's the first Friday of the month, and that means the U.S. Bureau of Labor Statistics has produced a new set of jobs numbers for October. Overall, there are lots of interesting and positive elements in this particular report.

Unemployment is holding at its record 3.7 percent level, which it hit last month for the first time since 1969 (49 years ago). According to this latest report, 250,000 jobs were added to the U.S. economy in October. That's a substantial jump over the September numbers, initially reported at a scary low of 134,000 and revised downward to an even scarier 118,000 in this latest report.

August numbers were revised upward from 270,000 to 286,000 which exactly offsets the September losses. This produces an average of 218,000 jobs per month for the most recent quarter, and contrasts nicely with the 211,000 monthly average over the preceding 12 month period.

Despite the September hiccup — which most experts attribute to effects of Hurricane Michael's rampage through the U.S. Southeast — jobs numbers are trending nicely and show continued and modestly improving economic growth.

Wages Hurdle a Significant Psychological Barrier

The really big news in this month's jobs report is on the wages front, though. Given record low levels of unemployment, basic economic theory says that wages must grow. For some reason, this fundamental correlation has failed to materialize in months gone by.

Wages finally popped upward in October, however, rising from 2.9 percent growth for the trailing 12-month period in September to a 3.1 percent level that hasn't been seen since 2009. Average hourly earnings hit a level of $27.30, up 5 cents from the preceding month, and $0.83 over the past year.

Indeed, this shows that wage pressures have finally forced things up to the point where they exceed the current inflation rate of 2.3 percent by nearly a percentage point (0.8 percent to be precise).

Of course, this will raise the heebie-jeebies among investors, who can't help but anticipate the Fed raising interest rates to keep inflation (which targets a 2.0 percent rate) in check. That said, Dow Jones and S&P futures are up solidly this morning, as I write this post, prior to today's market open.

Where Is the Job Growth Happening?

Job growth for October occurred in some industry sectors that are sure to bring cheer to blue-collar workers long searching for good news. Manufacturing grew by 32,000 jobs last month, along with a bump of 30,000 jobs for construction, 25,000 jobs for transportation and warehousing, and 42,000 jobs for leisure and hospitality.

All of these are solidly blue-collar, and show signs of fundamental and continuing economic growth. Together, they accounted for 129,000 of October's 250,000 jobs added: that's more than half that total, and somewhat unusual when looking back over the past two-to-three years.

Other sectors reporting growth include the perennially vibrant healthcare sector (up by 36,000 jobs) and the equally active professional and business services sector (up by 35,000 jobs). Mining, long a weak industry in the United States, managed a gain of 5,000 jobs.

Other sectors — namely, wholesale and retail trades, information, financial activities, and government — have remained largely unchanged over the past year and more.

The Take-Away: Good News, But Watch Those Rate Hikes

In my opinion, this is one of the best jobs reports we've seen in a while. Though we did crack the 300,000 jobs added barrier in several months in 2017, this is the first time we've seen wage growth jump ahead of inflation since the big recession hit in 2009.

I'm expecting more of the same to continue through the end of 2018, and into 2019 as the holiday shopping season unfolds, with the usual spike in hiring for the wholesale and retail trades.

It will be quite interesting to keep one eye on wage growth, and the other on the size and frequency of the Fed's interest rate hikes — one of which is now pretty much dead certain for December — as we transition from 2018 into 2019. It looks like the jobs market (and the whole economy) is finally starting to get a little air under its wings.

Thus the inevitable question: Can this continue and, if so, for how long? Stay tuned for next month's exciting report, and we'll find out!