This week has been a real doozy for U.S. data. The personal savings rate hit multi-year highs at 5.8 percent in February, showing that Americans are not spending the savings that they are accruing at the pump. The ISM Manufacturing index reached 51.5 in February, reflecting the slowest growth in the manufacturing sector we've seen since mid-2013. The Federal Reserve's current favorite metric of inflation, core PCE (personal consumption expenditure minus oil and food) was up 0.1 percent in February compared with January, but it was down 0.1 percent on a real basis (in chained 2009 dollars).
Nothing surprised more on the downside than this morning's jobs data though. One data point does not make a trend, but looking through the headline figure for the number of jobs we've been adding in the U.S. over the past few months, I'm still hugely underwhelmed. If we continue to mainly add low-wage jobs, then we're just throwing a handful of sand into the lake and expecting a big splash.
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Most of the jobs that we are adding have been in the services sectors, where wages tend to be much lower than in goods-producing industries. As long as we are adding new low-wage jobs, there will be little upward pressure on wages. Giving workers at McDonald's owned stores, Target and TJMaxx a raise looks nice back at headquarters and helps on the margins, but is not enough to move the dial on overall wage growth across the country.
Average hourly earnings growth has been volatile over the past few months, but it is hard to see any real, sustained upward pressure on wages. There is a huge oversupply of labor globally, and this will only get worse. The current glut of labor comes from billions of workers coming online in China, but next we will have workers coming online in India and Africa. Technological developments will replace some labor as well, exacerbating this oversupply.
If there is little upward pressure on wages, it is hard to see the Fed hitting its 2-percent inflation target over the next few years. So even if unemployment is dropping like a stone in the United States, the central bank's other mandate—inflation—remains stubbornly low.
In fact, if one were to calculate inflation via the consumer price index (CPI) in the United States using the same methodology used in the European Union, prices are falling, not rising (See Figure 1). For all the panic about deflation in Europe, it turns out the U.S. isn't all that far behind.