by Calculated Risk on 11/20/2014 08:43:00 PM

A few excerpts from a research piece on wages by economist Nathan Harris at Merrill Lynch:

After the deep freeze last winter, the labor market has steadily recovered over the last 10 months. Payrolls have averaged about 240,000 and the unemployment rate has dropped mainly for “good reasons”—because of solid jobs rather than falling participation. While it is very hard to pin down the inflation neutral (NAIRU) unemployment rate in real time, we seem to be in the neighborhood of NAIRU. At 5.8%, the official U-3 measure has dipped below its 30-year average of 6.1% and is approaching estimates of NAIRU from the FOMC (5.2 to 5.5%) and the Congressional Budget Office (5.5%). We like to focus on the broader U-6 measure. If the rate of decline over the last year continues, it will hit its historical average by next year and its pre-crisis average by early 2016.

What is missing from this labor lullaby is some sign of normal wage growth. There have been a number of head fakes—jumps in erratic second-tier indicators and pockets of pressure that never expanded. However, the two best gauges of pressure, total average hourly earnings (AHE) and the employment cost index (ECI) have shown few signs of life.

The good news is that while AHE are still stuck at 2%, there are now early hints of a pick-up in the ECI. After a very weak 1Q reading the index was solid in both 2Q and 3Q. Moreover, the pick-up is broad-based, including both wages and benefits and increases for most occupational groups and industries. Finally, just maybe, labor compensation is starting to pick up.

Before we get too excited about improved income or inflation, keep in mind that the recovery in both wage and price inflation is likely to be very slow.
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At this stage, it is not clear whether the long-awaited rise in labor costs has arrived or will start sometime next year. Two things are clear. First, the rise is likely to be very slow. Second, the Fed’s initial response will be to breathe a sigh of relief and they will only view it as a threat to the inflation target if it gets above its historic norm of 3.5%.

Friday:
• Early, the Black Knight Financial Services’ “First Look” at October 2014 Mortgage Data.

• At 10:00 AM ET, the Regional and State Employment and Unemployment (Monthly) report for October 2014.

• At 11:00 AM, the Kansas City Fed manufacturing survey for November.