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Goldilocks Growth for Wages and Jobs

After a strong June unemployment number was released Friday, the S&P 500 jumped 1.5%, likely moved by the headline: U.S. created 287,000 jobs in June vs. 175,000 expected.

But just as I tempered the despair following a crushingly-low May number (“Don’t Bet the Farm on Non-Farm Payrolls, June 8), I’ll remind you that this monthly data point is notoriously unreliable, though it often causes huge moves in the stock market.

However, other pieces of the Bureau of Labor Statistics’ monthly report contain real value, and they’re looking good. Data measuring wages and the number of people seeking work aren’t fodder for headlines though they illustrate a healthy employment picture.  And while these numbers exhibit some monthly variation, a stable upward slope in wages and job confidence should translate to higher consumer spending, which is good news for consumer stocks.

Wage growth clocked in at an annualized rate of 2.6% in June, up slightly from the 2.3% reported in May and the 2.5% seen in April. In fact, for most of 2016 wage growth crept up 2.5% to 3%, higher than the 2% growth realized in 2015. These are not huge gains, but are just enough to help consumers gain confidence that some income growth is dependable. Nothing freezes up a consumer’s wallet more than worrying that he’ll lose his job or be forced to accept a wage cut in the next few months.

While some retailers might yearn for higher wage growth, this 2% to 3% range is just right – the Goldilocks increase. Any lower and the increase would be too small to be noticed by workers; any higher and the number might set off some alarms for our friends at the Fed, who have noted that 4% wage growth might usher in unwanted inflation.

Fully Employed

Another number we like to watch in this report is the Part Time for Economic Reasons line item. This number measures the number of people who would prefer to work full time but have only been able to find part time work. As more of these workers find full time work, this number falls. In June it dropped 586,000 from May and has been steadily declining. Obviously a full time worker is a better spender than a part-time one.

Lastly we look at the nebulous but helpful Discouraged Worker line item. A discouraged worker is someone who has given up looking for work because of the disheartening employment prospects he or she has faced.

As this number increases it lowers the unemployment rate because this person is not counted in the denominator of total people looking for work, a quirky and perverse calculation that does not reflect an improving employment picture. It is another reason to be wary of the headline employment numbers. The number of discouraged workers fell 23% from last year and is down 7% from May. Although a decline in discouraged workers does not promise employment, it is an early indicator of future gains and a good sign that job prospects are looking up.

Slow and steady growth in wages and job prospects put a jump in consumers’ gait and should correspond to better news for consumer stocks. As we’ve noted before all consumer stocks are not created equally. At Profit Catalyst Alert and Growth Stock Strategist we’re hard at work to find just the right consumer stocks to benefit from improving employment.


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