Americans have long suffered from stagnant wages and climbing costs of living since the financial crisis and Great Recession a decade ago. But the US Labor Department reported this week that workers have finally seen the largest increase in nominal wages in a decade, as a tighter job market with low unemployment pushes wages upward. Though the new report is good news for employees, it could be bad for the US stock market, which is struggling after falling from record highs this year.
From September last year to this year, wages and salaries rose 3.1 percent, according to the Labor Department's Employment Cost Index for civilian workers, a measure of pay that doesn't account for inflation. The Labor Department's employment cost index rose 0.8 percent during the period. But gas, rent, and healthcare prices have also increased in the last year, undercutting much of the wage gains. When the Labor Department releases average hourly earnings numbers on Friday, investors will see a more complete picture of wage growth.
The factors behind rising wages include a hot labor market where employers find it difficult to hire skilled workers, as well as multiple minimum wage increases by cities, states, and companies. While it's positive for the middle class that wages are finally starting to catch up with record corporate earnings and executive compensation, the wage growth could spark the Federal Reserve to accelerate its schedule of interest rate increases. When the central bank raises interest rates, investors generally believe the action negatively impacts equities, as it makes companies' borrowing more expensive and fixed income assets more attractive.
Former Federal Reserve Chair Janet Yellen, who served from 2014 to 2018, has expressed concerns about the US government's growing deficit and the economy. She stated that the US debt path is unsustainable and offered a recommendation: "If I had a magic wand, I would raise taxes and cut retirement spending." In 2018, the federal deficit increased by 17 percent to $779 billion. Yellen added that the deficit will keep ballooning with government spending on Social Security and Medicare growing as more older people retire.
Normally, in a booming economy at risk of overheating and with high federal deficits, the Federal Reserve focuses more on fighting inflation with higher interest rates, especially with an inflation hawk like Jerome Powell as chair. Though higher interest rates help reduce employment and prevent an economy from overheating too quickly, they also make the government pay more interest on Treasury bonds, meaning a larger budget deficit. If the economy overheats and the deficit widens, the damage could hurt both stock market investors and workers who are finally seeing bigger paychecks.
