Labor Market Stabilization and Inflation Outlook (with Tom, Paul)

Claudia Sahm views the May jobs report as solid, with strong job growth but moderate wage growth that limits inflationary pressure. She believes the labor market is stabilizing and that the Fed should not be overly concerned about inflation from this data, though negative real wages pose a hardship for workers.

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New Century Advisors 4.5
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Claudia Sahm 8.5

Labor Market Stabilization and Inflation Outlook (with Tom, Paul)

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Strong labor market supports earnings but rising yields and negative real wages create headwinds for growth stocks.

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Strong jobs data reduces urgency for Fed easing, pushing yields higher in the near term, though moderate wage growth caps the move.

Non-farm payrolls added 172,000 jobs vs 88,000 estimate, with a 93,000 two-month upward revision. Underemployment rate fell from 8.2% to 8.1%.

Tom
Claudia Sahm

This is a solid report: job growth is strong but wage growth is still moderate and slowing, so the Fed should not see this as inflationary. The Fed is anti-inflation, not anti-jobs.

Unemployment stays low, underemployment ticks down, and wage growth is slowing. I don't see inflationary pressure here.
The 3-month moving average of non-farm payrolls is 188,000. Will this be revised down?

Tom
Claudia Sahm

I don't assume downward revision. Cleveland Fed research suggests these aren't anomalies, and administrative data may even show an upward revision for last year. This data puts an exclamation point on labor market stabilization.

Looking past 3 months, averaging around 100,000, we saw upward revisions. This really looks like stabilization relative to last year.
Wages are growing at 3.4% annualized, but CPI is expected at 4.2%. Wages are not keeping up with inflation.

Paul
Claudia Sahm

Wages not keeping up with inflation limits purchasing power and prevents second-round inflationary effects from wage bargaining. This data does not show inflation feeding on itself.

The flip side is hardship for workers as paychecks are eaten up, and it limits businesses' ability to pass on costs. That pain will go somewhere in the system.

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