Wall Street would not be surprised by better-than-forecast October jobs growth Friday, but markets could be spooked if there's an unexpected pickup in wage growth—a sign of an improving labor market and also possible inflation on the horizon.
Economists expect to see 231,000 nonfarm payrolls, and an unchanged unemployment rate of 5.9 percent when the October employment report is released at 8:30 a.m. EST. Average hourly earnings are expected to rise 0.2 percent, after being flat in September. That would be in line with the trend—average hourly earnings are up by 2 percent over the year.
"If (wages) came in at 0.3 it wouldn't be a surprise. It feels to me like the job market is very strong. It's not back to normal yet because we're still working off this slack, but we're working it off very fast now," said Mark Zandi, chief economist with Moody's Analytics. "Another year from now, we'll be getting back to full employment, and in a year or two, the labor market will be tight. And three years from now, our biggest problem will be a lack of labor, not unemployment."
Traders, however, are on the watch for any rise in wages in the employment report because there have been the first signs of a pickup in other data. Rising wages are good for the economy but too much too fast could signal inflation, and that could be a prompt that could get the Fed to consider raising rates. Markets are hypersensitive to anything that suggests the Fed could move off the sidelines sooner than expected.
"The crux of the matter is if we're seeing wage pressures here, (the bond market is) going to respond, and if we're not, (it's) going to respond," said David Ader, chief Treasury strategist at CRT Capital.
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Bond yields rose Thursday, as prices declined ahead of the employment report. The 10-year yield was 2.37 percent.
"The back up in interest rates and the price action would suggest the market's is looking for a beat," Tyler Tucci, RBS short term market and derivatives strategist.
Nomura Securities head interest rate strategist George Goncalves said he is not expecting the market to move on the jobs report Friday, unless nonfarm payrolls come in above 250,000, with average hourly earnings data turning up.
Traders say a difference in this month's jobs report is that they will look at the headline, then the wages data before they look at the unemployment rate.
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"Average hourly earnings has pretty much been around 2 percent," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.
"My guess is this isn't the series that's really going to get the Fed concerned. It's going to be labor costs and productivity."
The Labor Department reported Thursday that unit labor costs rose at a 0.3 percent rate in the third quarter, after declining at a 0.5 percent rate. Compensation per hour rose at a 2.3 percent rate, and hourly compensation was up 3.3 percent from a year earlier, the fastest pace since the fourth quarter of 2012.
The Employment Cost Index, the broadest measure of labor costs, rose 0.7 percent in the third quarter, the same pace as the second quarter. Economists had expected a smaller rise in both quarters. Wages and salaries—which make up 70 percent of employment costs—increased 0.8 percent in the third quarter, the largest increase since the second quarter of 2008.
"The year-over-year trends are gradually moving in the direction the Fed wants," said LaVorgna. "They want higher compensation and they want higher wage costs before they can move on rates."
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LaVorgna said the pickup is still well below where the Fed would come off the sidelines. "We've seen a jump. We need to see another quarter of acceleration. We haven't seen a lot of other evidence of wage pressure," he said. "We want to keep watching. When we hit 6 percent unemployment rate that's the highest we typically are at when we start to see wage pressures."
Pierpont Amherst Securities chief economist Stephen Stanley said while there's anecdotal evidence of rising wages, there hasn't been convincing proof in the aggregate data. "Hourly compensation figures in the productivity report and average hourly earnings have remained benign. I am highly confident that faster wage gains are coming, but it may take a few more months for them to show up more clearly in the broad data," he wrote, adding the flat September wage growth means the October gain would have to be very large to get markets excited. "More realistically, this story is likely to play out mostly in 2015."
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Susan Woodward, Intuit financial economist and founder of Sand Hill Economometrics, said rising wages are showing up in Intuit's survey of small businesses, but wages aren't rising across the board.
"The group that has done the best is professional services—lawyers and accountants," she said. Intuit expects small businesses, employing fewer than 20 workers, added 15,000 payrolls in October, the second highest since June's 24,000.
She said jobs growth is moving along, and wages are picking up slightly with lower-end workers basically seeing flat wage growth. Woodward said Intuit's data shows small-business revenues are up 27 percent over the last five years, with professional services business revenues up 37 percent. Health-care revenues were up just 11 percent while construction is up 30 percent and real estate services are up 24 percent.
Economist say the market may be fixated on wage pressures too soon since the labor market is not improving in a consistent way.
Zandi said there are wage pressures in some fields where there is a need for workers. "It's most evident in the middle of the country. You can draw a line from North Dakota to Texas. There is a lot of growth there. Certainly, in the trucking industry there's a shortage there. Certainly manufacturing, there's a shortage there," he said.