Why the February Jobs Report Is the Most Important Jobs Report of 2018

A decade after the 2008 financial crisis, American workers are finally benefiting from rising wages. Will it last?

Unemployment is at a 17-year low of 4.1%, economic growth is accelerating, and companies are set to get a big tax windfall this year that could lead to eventual increases in corporate investment spending and, possibly, additional hiring.

Yet as the economy heats up, Federal Reserve policymakers have been flummoxed by stubbornly low inflation readings, in turn partly a function of anemic wage growth.

Now, signs are appearing that the benefits of a faster economy are starting to flow through to workers, albeit slowly. Average hourly earnings in the U.S. climbed by 2.89% in January from a year earlier, up from 2.7% in December and 2.47% in November. Those figures are still well below the 3.5%-plus readings notched in 2007, just before the crisis hit, indicating room for further gains. 

For Federal Reserve policymakers, the wage rebound is a source of vindication following their unprecedented efforts to stimulate the economy and markets by injecting some $4 trillion of freshly printed money into the financial system in the aftermath of the crisis. Yet many investors have viewed the pickup in worker earnings as a warning sign that the Fed won't veer from its plan to gradually tighten historically loose monetary policy -- thus slowing the stock market's march in recent years toward ever-higher levels.

While Fed officials, led by Chairman Jerome Powell, say they plan to keep the economy from overheating, many traders just want more heat - especially if that means further gains in U.S. stocks that have surged more than 70% over the past five years, as measured by the Standard & Poor's 500 Index.

"This is a critically important jobs report," said Mark Hamrick, senior economic analyst at research firm BankRate.com. "It is unfortunate that there is this disconnect between the needs of American workers and what the financial markets are processing. Wage growth has been the most unsatisfying aspect of this now-nine-year old economic expansion."

A report early Friday from the U.S. Labor Department is expected to show that wages climbed 2.8% in February from a year earlier, with unemployment falling further to 4%, based on economist surveys by the data provider FactSet.

While the projected increase in wage growth would represent a slight tick downward from the January reading, it would add credence to the notion that wages are set for further gains, said Steve Blitz, chief U.S. economist at analysis firm TS Lombard.

"Everything says that wages are beginning to trend higher," Blitz said in a phone interview. "Given the continued expansion of jobs and the economy and the low level of unemployment, you can only assume upward pressure on wages going forward."

For traders, the takeaway is likely to be that the Fed will continue along its path of raising interest rates gradually. Stock analysts at Credit Suisse, the Zurich-based bank, wrote Thursday in a report that rising wages should be seen by investors as "more relevant" than this week's focus on President Donald Trump's proposed steel tariffs, which have rattled markets due to concerns about a debilitating trade war.

"An overheating labor market poses the greatest threat to profit margins and could force the Fed to become more engaged," according to the Credit Suisse report.   

The Fed raised interest rates three times in 2017, bringing the target to a range of 1.25% to 1.5% from near zero before the central bank started the current hiking cycle in late 2015. A rate increase at a meeting later this month of the central bank's monetary-policy committee is deemed by most traders to be a near certainty.

Members of the Fed's monetary-policy committee have fretted that the recent pickup in growth has not brought a corresponding increase in inflation at the pace seen in prior eras.

In a speech this week in New York, Fed Governor Lael Brainard said that "one of the striking features of the current recovery has been the absence of an acceleration in inflation as the unemployment rate has declined."

"Although wage gains have seen some recent improvements, they continue to fall short of the pace seen before the financial crisis," she said.

Yet Powell, for one, has expressed increased confidence that the Fed's preferred measure of inflation, currently tracking at about 1.7%, is rising toward a target of 2% -- especially as businesses begin to reap the savings from the recently enacted tax cuts.

"The robust job market should continue to support growth in household incomes and consumer spending," Powell told Congress in testimony last week.

Fed officials currently project three quarter-point rate increases this year, but TS Lombard's Blitz said he thinks upward wage pressure could spur the central bank to raise rates four times.

"We are clearly seeing an acceleration in wage growth," said Hamrick, of BankRate.com. "The question is how much and if it's too much, and if it causes the Fed to drink more coffee."