Three Sectors Explain Most of Deceleration in U.S. Wage Growth

(Bloomberg) -- The deceleration in U.S. wage growth in April was relatively broad-based, with eight of 13 sectors seeing a down-tick. But three sectors made an outsize contribution to the slowdown: education and health services, financial activities and manufacturing.

The large number of Americans employed in education and health services makes it the biggest contributor to overall wage growth, and pay gains in that industry haven’t seen much of an acceleration since mid-2017. Because of the sector’s size, this will have to pick up further if overall U.S. wage growth is to rise to 3 percent, according to Omair Sharif, an economist at Societe Generale.

Pay developments in the financial activities sector are especially interesting because of the rapid acceleration in wage growth since mid-2017. From July to January, that pickup lifted overall U.S. wage growth by nearly two tenths of a percentage point all by itself. There was a similar surge in 2011 and 2012, however, which ultimately unwound.

The deceleration in gains for manufacturing workers is a bit of a mystery. The annual increase dropped to 1.4 percent in April from 1.7 percent in March. An alternative Labor Department measure published last week showed manufacturing wage growth was 2.6 percent in the first quarter.

Wage growth in another major sector by number of employees -- leisure and hospitality -- also continued to decelerate in April, to the slowest pace since December 2015. Since mid-2017, it’s chipped two tenths of a percentage point off of overall U.S. wage growth. This is another trend that will probably need to reverse if wage growth is to meaningfully accelerate, because historically, this sector has been among the most procyclical. That means pay here was most likely to continue accelerating as an economic expansion lengthened.

There were encouraging developments in other procyclical sectors in April. Construction wage growth accelerated to the highest since 2009, while retail -- which has been hit in recent years a brick-and-mortar retailers struggle to compete with online sellers -- also saw a sizable jump.

Add it all up and it probably means Federal Reserve officials will have to reduce their estimate of the so-called natural rate of unemployment, below which inflation ought to accelerate, according to Bloomberg economists Carl Riccadonna and Niraj Shah. The unemployment rate fell to 3.9 percent last month, its first time below 4 percent since 2000. Fed officials, in projections published in March, indicated they believe the natural rate is about 4.5 percent, according to the median estimate.

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