Stagnant wages in the fourth quarter could drive the Fed to rethink its policies.
Wage growth has been missing from the U.S. recovery since 2009. A debate rages about whether this reflects the generally weak characteristics of this cyclical recovery or a structural problem in the labor market. According to the latter theory, U.S. companies are generating job openings, but there are too few workers with the right skills to fill them.
The recovery is strong enough, in our view, to resolve this debate. Our analysis of the relationship between the unemployment rate and wage growth (our take on the traditional Phillips curve) suggests that wages should begin rising when the unemployment rate crosses a threshold of 6.5%. Coincidentally, when the Fed originally launched QE3, it named 6.5% as the rate at which it would remove "emergency" measures.
U.S. unemployment dropped to this rate in the first half of 2014, and has since fallen below 6%. In addition, the JOLTS (Job Openings and Labor Turnover Survey) data of the Bureau of Labor Statistics show that there are more unfilled jobs today than at the peak of the last expansion in 2006 and 2007.
If wages are going to rise during this expansion, now is the time, when employers need to bid for workers to fill open positions. If wages continue to languish, then something is wrong with the Fed’s traditional models and assumptions.
Read the full Putnam Capital Markets Outlook.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.