Lack of Wage Growth and Profit Taking Behind US Stocks and Oil Being Down on Friday

01/09/2015 5:34 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

US stocks and oil were down Friday partly because of disappointment over a lack of wage growth in an otherwise strong jobs report, but MoneyShow’s Jim Jubak thinks the more important reason is profit taking before a weekend after a 3% jump in the S&P over the previous two days.

US stocks and crude oil were both down today, January 9, at the close in New York.

Part of the reason is disappointment at a lack of wage growth in an otherwise strong December jobs report released this morning. That has once more raised fears that economic growth will be weaker than hoped.

The other part of the reason, the more important part in my opinion, is normal profit taking before a weekend after a 3% jump in the Standard & Poor’s in the previous two days.

The headline numbers on the December jobs report were good enough. For the month, the US economy added 252,000 jobs, ahead of the consensus expectation among economists surveyed by Briefing.com for a 245,000 gain. November jobs growth was revised upwards to a very strong 353,000 from a previously reported 321,000. The official unemployment rate fell to 5.6% from 5.8% in November as, once again, labor force participation fell. (The U6 unemployment rate, which includes discouraged workers who have stopped looking for work and workers with part time jobs who would like full time work, dropped to 11.2% from 11.4% in November.

The problem was wage growth—or more precisely—the lack of wage growth. Average hourly wages in December dropped by 0.2% after a 0.2% gain in November. (The November number was revised downward from the previously reported 0.4% growth.) Over the last 12 months, average hourly earnings have climbed by just 1.7%, roughly keeping up with inflation. The average workweek stayed steady at 34.6 hours.

With hours worked holding steady, the drop in hourly wages prevented any increase in aggregate income for the month, even with the increase in jobs. Aggregate income was essentially flat for December.

Which is what has raised worry about the economy in the wake of the report. If incomes are flat, it throws the burden for creating growth in the US economy on the willingness of consumers to borrow more in order to up their spending and on the power of lower energy prices to put more dollars into consumers’ wallets. Those are less certain foundations for growth than rising incomes would be since a willingness to increase borrowing depends on confidence in the economy (which can shift suddenly) and on a continued drop in energy prices when crude oil is already lower by 50% or more.

One implication of an economy (that's adding jobs but not showing much growth in aggregate incomes) is that the Federal Reserve could well decide that the economy remains fragile enough to delay a first interest rate increase into late 2015 or even early 2016. That was certainly the thrust of remarks from Chicago Fed President Charles Evans. On the basis of the data, Evans said, he does not see a need to raise interest rates until 2016 and he doesn’t see inflation hitting the Fed’s 2% target until 2017. Evans, who is a voting member of the Fed’s rate setting Open Market Committee, counts in that body as an inflation dove and has consistently argued for delay in raising interest rates.

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