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Economic Update

2018/11/07

U.S Wage Growth May Take Off as Slack in the Job Market Fades

The latest figures from the U.S. Labor Department show that average hourly earnings rose 3.1% year-on-year in October, the fastest pace since April 2009.

The headline unemployment rate, also known as U-3, remained steady at a multi-decade low of 3.7%. The U-6 rate, a measure of unemployment with a broader definition, edged down to 7.4%, its lowest level since 2001.

The U-6 rate includes those who work part-time because full-time work is not available, and those who have given up on finding work. At the height of the financial crisis, the U-6 rate was as high as 17.1%. In a healthier job market, U-6 is usually closer to U-3, which means fewer people are involuntarily working as part-time workers, or are even too depressed to seek jobs. As such, the gradually narrowing gap between U-6 and U-3 is a welcome signal for the U.S. economy (Figure 1).

Wage growth in the United States has been relatively slow since the financial crisis, even though the job market is strengthening. As “slack” in the labour market is being absorbed continuously, upward wage pressure should now be bigger than a few years ago. So we may see average hourly earnings increase more quickly in the next 12 months.

The improving job market and the sustained economic growth momentum have increased the likelihood that the Federal Reserve will raise interest rates by another 25 basis points by the end of 2018. The Fed has already raised interest rates three times this year, bringing the Federal Funds Rate target to 2.00–2.25%. If wage growth accelerates, the Fed may lift interest rates more quickly.

These moves will likely have an impact on Hong Kong. Commercial banks in Hong Kong kept their prime rates unchanged for the past decade until recently. Now, interest rates are on the path of normalization, which means the real test for Hong Kong’s economy may be on the horizon.

In the past, whenever the U.S. raised interest rates to prevent its economy from overheating, Hong Kong would generally benefit from strong demand from the U.S., partially offsetting the negative impact of higher interest rates. In the face of the trade war and the uncertainties it is generating, we might not benefit as much as before.

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