Real Time Economics: What Is Wage Growth Telling Us About the Labor Market?

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

The Federal Reserve is expected to leave rates on hold today, home-price growth slowed to its lowest level in nearly seven years and the government is quietly revolutionizing the way it collects economic data. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

MAYBE THE LABOR MARKET ISN’T HISTORICALLY TIGHT

U.S. workers’ paychecks improved solidly in the past year—but wage gains remain soft compared to two other periods when the unemployment rate held at historically low levels. When adjusting for inflation, hourly pay for nonsupervisors was up 2.4% from December 2015, when the unemployment rate began a 40-month stretch at 5% or less. In the 1990s, the unemployment rate was slightly higher, but wage growth was better, advancing nearly 5% in 40 months of 5%-or-less unemployment. Wages were up more than 4% in a similar span during the 1960s. Watch the Labor Department’s April jobs report to see if wages return to an upward trajectory, after a very modest increase in March, or if more Americans moving into the labor force allows employers to keep a lid on wages. —Eric Morath

The April employment report is out Friday at 8:30 a.m. ET.

WHAT TO WATCH TODAY

The ADP employment report for April is expected to show a net gain of 177,000 private-sector jobs from the prior month. (8:15 a.m. ET)

IHS Markit’s manufacturing index for April is expected to hold steady at 52.4. (9:45 a.m. ET)

The Institute for Supply Management’s manufacturing index for April is expected to tick down to 55.0 from 55.3 a month earlier. (10 a.m.ET)

U.S. construction spending for March is expected to be unchanged from the prior month. (10 a.m. ET)

The Federal Reserve releases a policy statement at 2 p.m. and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET.

TOP STORIES

STEADY AS SHE GOES

Fed officials are poised to leave interest rates unchanged today. Firmer economic data has made it easier for officials to maintain their pledge to be “patient” on rates. But that refrain might grow stale later this year, especially if there are any surprises—positive or negative—for economic growth, inflation or hiring, Nick Timiraos writes. The big question: What would it take for them to move off the sidelines?

• Consumer prices. Inflation is again below the Fed’s 2% target. Chairman Jerome Powell’s read of inflation dynamics could offer important clues about what might lead the Fed to maintain or abandon its current “patient” posture.
• Low bar. Officials have signaled that the bar to raise rates remains higher than in recent years because of soft inflation. But there has been less clarity where the bar is for a cut. Markets will be attuned for any signals from Mr. Powell about the Fed’s path if weak inflation persists.

TARGET RANGE

Here’s an interesting (if slightly technical and nerdy) Fed subplot: The central bank may have to tweak the mechanics of how it influences the economy. The Fed’s benchmark federal-funds rate has in recent weeks traded near the top end of its 2.25%-2.5% target range. In fact it’s exceeding the Fed’s tool to cap short-term rates: The interest on excess reserves rate, or IOER, is set at 2.4%. Something similar happened twice last year, and when it did, the Fed lowered the IOER. Some analysts expect a similar move either this month or in June. But others see a more persistent issue. They reckon bigger changes may be needed to ensure the central bank has control over the short-term rate it uses to achieve its inflation and hiring goals, Michael S. Derby reports.

ANOTHER ONE BITES THE DUST?

One last bit of Fed news (at least until 2 p.m. ET): Another one of President Trump’s picks for the Fed Board of Governors is facing stiff resistance in Congress. President Trump recently tapped conservative commentator Stephen Moore and former restaurant executive Herman Cain for top jobs at the central bank. Mr. Cain withdrew after Senate opposition essentially sank his confirmation chances. And now GOP senators, including some of the president’s strongest allies, say Mr. Moore’s views of the Fed, personal financial issues and writings about women make it difficult for him to win confirmation, Kristina Peterson and Paul Kiernan report.

IT’S A BEAUTIFUL DAY IN THIS NEIGHBORHOOD…

Home-price growth slowed to its lowest level in nearly seven years in February, a sign the housing market is moderating heading into the spring selling season. Home-price growth has been slowing for nearly a year, welcome news for first-time buyers who have been struggling to get into the market, Laura Kusisto reports.

…BUT MAYBE NOT THIS ONE

The Canadian economy contracted slightly in February and Mexico’s economy contracted in the first quarter of the year. Both results stand in sharp contrast to robust first-quarter gross domestic product growth in the U.S.

TARIFFS TRIP UP TALKS

High-level trade talks between the U.S. and China resumed Tuesday. How and whether to remove the tariffs the two governments imposed in the earliest phases of their dispute are now at the forefront of negotiations, Chao Deng reports.

The Trump administration has levied $250 billion in tariffs on Chinese goods. The U.S. wants to leave some in place as a tool to enforce an agreement while Chinese negotiators see them as an affront. The negotiators are also looking for solutions in other areas, including persuading Beijing to provide greater access to China’s cloud computing market and agricultural markets.

DEEP DIVE: BIG DATA

Anyone interested in how the government tracks the economy should read David Harrison’s story detailing a quiet revolution in the way agencies compile data. Right now, government statisticians rely on surveys of households or businesses and store visits to gather information, techniques pioneered in the 1940s. But survey response rates are falling, and Americans no longer shop the same way they did 80 years ago. So the government is slowly shifting its methods.

• Case study: A U.S. inflation report released in April gathered data for the price of apparel directly from a big department store instead of sending people out to stores to check prices. With the switch, government economists saw the largest monthly drop in apparel prices on record. Lower apparel prices, in turn, muted overall inflation estimates.
• Big picture: The data-gathering change is part of a broader government effort to incorporate insights from the massive amounts of information that firms collect into official economic indicators. Within the next five years, the Bureau of Labor Statistics plans to replace much of its existing price-measurement practices with these so-called “Big Data” sources.

QUOTE OF THE DAY

Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go… ….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. —President Trump, in a series of tweets

TWEET OF THE DAY

WHAT ELSE WE’RE READING

Graduating during a recession is awful. “Our results demonstrate that health, mortality, and economic and personal well-being in midlife can bear the lasting scars of disadvantages that come during young adulthood. Simply put, the bad luck of leaving school during hard times can lead to higher rates of early death and permanent differences in life circumstances,” Stanford University’s Hannes Schwandt writes in a policy brief.

The Fed’s patience isn’t a virtue. “The Fed receives a host of new economic data every week, if not every day. So should it consider changing interest rates every week or every day, rather than once every six weeks, as it currently does? Ideally, yes, it should. Whenever the Fed ignores new information about the economy, it is allowing inflation and employment to move away from their desired levels,” former Minneapolis Fed President Narayana Kocherlakota writes at Bloomberg Opinion.

SIGN UP FOR OUR CALENDAR

Real Time Economics has launched a downloadable Google calendar with concise previews, forecasts and analysis of major U.S. data releases.

• To add to your Google Calendar on desktop, click here.  
• To add to your Google calendar app on mobile, click here.
• If you prefer to view the calendar using a web browser, with the option of adding select Real Time Economics entries to your calendar, click here.
• And here’s our how-to.

Let us know what you think. This is a pilot project, so we’d appreciate your feedback.