MAY 7, 2018 – UNEMPLOYMENT RATE KEEPS FALLING BUT WAGES FAIL TO RALLY
Non-farm payrolls rose 164,000 in April, missing the consensus estimate of 193,000. But, despite the lower results, the unemployment rate fell to 3.9 percent after holding for six months at 4 percent. The unemployment number is the best in 18 years. However, wages remain stubbornly low, with average hourly earnings rising by 4 cents in April, a 2.6 percent annualized gain.
Job creation is ahead of the natural growth rate of the labor force, which is driving the unemployment rate lower. This data, combined with stagnant wages, indicates the neutral level of unemployment is considerably lower than that seen in past economic cycles. The lack of wage pressure will be something that will continue to concern the Fed. If inflation doesn’t start picking up, the pace of rate increases could slow down. Though some economists feel wage pressure is building, and the current path for interest-rate normalization is appropriate.
Two additional rate hikes in 2018 seem certain; the jury is still out on a third. As rates continue to remain low, we recommend the use of interest rate swaps to guard against the expectation of rate hikes later this year.