Monthly Economic Review: November 2018

From jobs to GDP, the economy continues to grow
2018 November MER

The U.S. economy saw strong growth during the third quarter as gross domestic product adjusted for inflation increased at an annual rate of 3.5 percent, continuing the momentum built throughout the year, according to the U.S. Bureau of Economic Analysis. That’s slower than the 4.2 percent growth in the second quarter but still above the long-term trend of approximately 3 percent and well above the 2.3 percent average since the current expansion began in the third quarter of 2009. Consumer spending during the third quarter grew by a strong 3.6 percent year over year and business investment was up 2.5 percent. Importantly, the economic fundamentals for growth remain in place.

The economy and the labor market keep rolling along, and job growth continues to be a driver of confidence and spending. Job gains remained strong through October, averaging 212,000 monthly, and in the last 12 months U.S. payrolls have increased by 2.5 million workers. The unemployment rate remained at 3.7 percent, the lowest since December 1969. The bottom line is that the U.S. job growth engine shows no sign of slowing down yet.

As previously emphasized, consumer spending and, in turn, retail sales correlate closely with income and wage gains. The tightening labor market is finally causing firms to raise wages, with average year-over-year increases breaking the 3 percent barrier for the first time in nearly 10 years.

The Bureau of Labor Statistics calculates two different measurements of wages. The most frequently cited is average hourly earnings, which were up 3.1 percent year over year as of October, breaking the 3 percent rate for the first time since April 2009. While this number is released each month and is a timely indicator of regular wages, it does not include bonuses or other types of pay. Its primary disadvantage is that it does not account for composition shifts of employment. For example, if employment gains are strong in a high-wage industry, then average hourly earnings can increase even if wages elsewhere are unchanged. Due to this methodology, the indicator can be less stable.

The other indicator is the employment cost index, which measures both wages and overall compensation and is watched closely by the Federal Reserve. Looking at just private-sector wages and salaries, the ECI rose sharply in the third quarter with a 3 percent year-over-year increase that was the highest since the second quarter of 2008. Because the ECI is a fixed-weight measurement of occupations and industries, it is less susceptible to changes in the mix of employment. Its disadvantage is that it is only estimated quarterly, providing less timely information than the hourly earnings number.

While the surge in payrolls might make headlines for the press and politicians, the 3 percent-plus wage gains are the data that probably catches the eyes of the Federal Reserve’s Open Market Committee the most as members debate monetary policy actions. Although faster wage growth could prompt an acceleration in the pace of inflation, it has been on a meandering and slow path upward and a sharp pickup is not anticipated. At a recent meeting of business economists, Fed Chairman Jerome Powell said he doesn’t see evidence that the labor market is at risk of overheating or pushing up prices.

While November retail sales — the first monthly leg of the holiday season — will not be released until mid-December, disposable income and consumer spending data showed solid growth in October. These numbers were headed in the right direction as households entered the holiday season and were consistent with NRF’s holiday forecast of up to 4.8 percent growth over 2017.

Download this month's report, which includes the following charts and highlights:

  • Consumer sentiment
  • GDP
  • Job openings and hires
  • Private payrolls
  • Consumer price index
  • Income and spending
  • Leading economic index
  • Online sales