Economists think workers are finally going to start seeing bigger paychecks

Key Points
  • Economists are convinced that wage growth will see meaningful gains in 2018, even after closing out last year with just a 2.5 percent increase in average hourly earnings.
  • One economist sees wage growth accelerating to 4 percent by the end of the year.
  • Fed officials have been watching wages closely, and a significant uptick could prompt quicker interest rate hikes.
For the record, this is a good jobs report: Economist

While workers remain frustrated at the lack of growth in their paychecks, economists are convinced that 2018 finally will be the year that wages pick up.

Friday's mediocre job report did little to dim those hopes that sufficient momentum is picking up for a breakout year for earnings.

The December payrolls report "is not super relevant because it [is] pre-tax reform," said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors. "In the next three to six months we are likely to see the budding emergence of increased wage inflation that will boost inflation expectations."

Doty's comments are representative of Wall Street experts who see the jobs market at or near full employment. The shrinking pool of workers can only lead to more wage growth, they argue, which in turn will boost the overall weak inflation picture that has vexed Federal Reserve officials.

They believe the tax reform package Congress passed in December will help add to wage growth. Multiple companies already have announced they are awarding bonuses based on a windfall from the slashed corporate tax level. Most American workers also will be seeing tax reductions.

The wage-growth argument, though, got only a marginal boost from the December numbers.

Average hourly earnings rose 0.3 percent for the month to reflect an annualized gain of 2.5 percent — both about in line with economist expectations but still around the prevailing levels that have kept wages in check for most of the post-recession period.

An employee attaches a tag to a jacket at the Joseph Abboud Manufacturing facility in New Bedford, Massachusetts.
Scott Eisen | Bloomberg | Getty Images

Despite the slowness, the Fed is expected to proceed with at least three rate hikes this year, with several prominent central bank watchers making room for the possibility of a fourth move. The Fed's pace is important in that it not only determines the interest rate for most consumer debt but also indicates how concerned officials are with the pace of growth.

If officials believe growth is getting out of hand, they're more likely to get aggressive with rate hikes and possibly choke off what is expected to be a strong year.

Fed officials have indicated they believe the weakness in inflation won't last, a sentiment that is gaining a growing list of adherents.

"The increase of average hourly earnings at a 2.5 percent rate on a year ago basis likely understates the true pace of wage and compensation growth due to a tight labor market," said Joe Brusuelas, chief U.S. economist at RSM.

"With the major narrative going forward is likely to be where firms will get the skilled workers necessary to boost productivity and meet demand it is likely that wages will accelerate in 2018," he added. "With wage gains in metro areas starting to pick up, and minimum and livable wages slated to rise starting in January we think that wages and overall compensation will accelerate in 2018 reaching 4 percent by the end of the year."

If that happens, it will represent the final piece of the puzzle both for economic growth and Fed policy.

The central bank is tasked both with maintaining an economy at full employment and price stability that officials believe equates to 2 percent inflation. A meaningful gain in wages would mean the recovery has come full circle and the Fed can continue to normalize policy after the highly accommodative measures during and following the financial crisis.

"Look at where the jobs are being created. These are career-type jobs," JJ Kinahan, chief market strategist at TD Ameritrade, said of growth in manufacturing and construction that happened in December. "It's headed in the right direction."

WATCH: Jim Cramer talks about the impact from Friday's jobs report.

For the record, this is a good jobs report: Economist