The US jobs market is probably one of the closest watched economic indicators this year. As Wall Street tries to second-guess when the Federal Reserve will make its move to raise interest rates again, US jobs market indicators have become a proxy for the general health of the economy and possible indicator of future rate hikes.

Wage Growth Set To Weight On Profit Margins

After a rocky start to the year, data releases during the past few months have shown that the US jobs market is in robust health. The US labour market expanded at a solid pace for the second straight month in July. The economy added 255,000 jobs (after an upwardly revised 292,000 surge in June), and the jobless rate was unchanged at 4.9%.

Wage Growth Is Only Just Getting Started

It’s fair to say that some analysts were surprised by the robust July jobs figures after the dismal US Q2 GDP reading. The first estimate of Q2 GDP published at the end of July was for growth of 1.2%. The Commerce Department has since revised this figure down to 1.1%. The economy grew at a 0.8% pace in the first quarter. It grew 1% in the first half of 2016.

Still, while it would appear that the US economy is struggling to achieve any real growth, it looks as if the labour market is taking off. Average hourly earnings, a closely watched indicator of labour market slack, increased to 0.3% last month, bringing the year-on-year gain to 2.6%. The average workweek increased by 0.1 hours to 34.5 hours in July, the most since January. Workers’ take-home pay shot up 0.6%.

US GDP wage growth


Analysts at Macquarie believe that wage growth will continue to accelerate throughout the rest of the year as the labour market tightens further.

Wage growth stronger in many states 

Macquarie’s analysis shows that the single largest detractor from aggregate US labour market wage growth during the past 12 months has been the state of the labour market in oil states. Wage growth in oil states has decelerated significantly since early 2015, bottoming at close to 0% in early 2016. However, over the summer wage growth in oil states began to tick higher rebounding to 1% in July. Meanwhile, wage growth in non-oil states was 2.9% year-on-year as of June 2016, the highest level since March 2009.

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Non-oil states are generally seeing rapid wage increases. The percentage of non-oil states with year-on-year wage growth greater than 3% is tracking just under 50% the highest level for more than a decade. Non-oil states represent 87% of national employment.

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Overall then, wage growth is accelerating indicating that the conditions in the US labour market are tightening. A recovery in oil state wage growth will also drag up the national average.