The potency of higher pay

The stock market volatility that greeted investors in February was triggered by a sharp jump in worker wages. Was it a quirk of economic circumstances or something sustainable?

Investors will have the chance to consider more evidence on Friday when the February jobs report is released. The yearly average hourly earnings will be scrutinized for signs of sustained strength.

In January, that statistic grew by 2.9 percent — its fastest pace since 2009. When it was released on Feb. 2, the S&P 500 stock index fell more than 2 percent. One week later, the index had shed 7 percent. The bond market also sold off, sending the 10-year Treasury bond rate up to a four-year high. While there were several factors contributing to the market sell-offs, the bump up in worker pay was the tipping point.

What’s changed in a month? Well, new Federal Reserve Chairman Jerome Powell said his confidence is growing that “inflation is moving up to target.” What he means is that the general rise in prices in America is growing close to 2 percent a year — the Fed’s long-sought-after goal after the Great Recession. The implication of reaching the goal is a more hawkish Central Bank, ready to raise its target interest rate more frequently in an effort to head off fast rising inflation.

Wages went up for lots of workers last month, thanks to new withholding guidelines driven by the tax law. For a single person earning the average weekly wage, the new law adds about $28 a week to their pay after federal taxes. But it is important to note the data that will be released on Friday are pretax pay.

One month ago, the wage data fed inflation concerns. In the week ahead, investors will learn if it was a fluke.

This story was originally published March 2, 2018 at 6:08 AM with the headline "The potency of higher pay."