A tight labor market and rising wages aren’t generating substantial inflation pressure, a Federal Reserve report said Wednesday, muddying the economic outlook for Fed officials ahead of their September policy meeting.
Overall, the economy continued to expand at a modest pace in July and August, and respondents said they expected growth to continue at a “moderate” pace in the coming months, according to the central bank’s beige book, a review of regional economic conditions. The survey collected anecdotal information on economic activity from early July through Aug. 29, from 12 district banks.
Most districts cited tight labor markets and moderate growth in hiring, consistent with steady payroll gains reported by the Labor Department in the past two months. Upward pressure on wages continued to build, especially for workers with specialized skill sets such as engineers and certain construction workers. But the pickup in wages didn’t translate into significant inflation pressure, the report said. Price increases were described as “slight overall.”
The report illustrates some of the challenges facing the U.S. economy as it struggles to break out of its uninspired growth trajectory in the third quarter. Hiring has been steady throughout much of the expansion, but has only recently begun to translate into noticeable wage gains. Low energy prices for much of the past two years held inflation in check. In July and August, the beige book reported, a “potential record national harvest” weighed on prices for agricultural products.
Fed officials are looking for signs of inflation as they weigh an increase in interest rates at their next policy meeting Sept. 20-21. Fed Chairwoman Janet Yellen in late August said she believed the case for increasing the benchmark federal-funds rate “has strengthened in recent months,” citing the “solid” performance of the labor market as one factor. An August survey of economists by The Wall Street Journal found more than two-thirds of economists expect the Fed to wait until December to raise interest rates.
But the labor market may be hitting a snag. A separate report released Wednesday from the Labor Department showed job openings in the U.S. hit a record high of 5.9 million in July, even as hiring remained unchanged from June at 5.2 million. That suggests firms are having trouble filling certain openings, a notion echoed by anecdotes from the beige book.
“In many Districts, businesses reported trouble filling job vacancies for high-skilled positions,” the beige book said, including technology jobs, engineering and construction work. Wage pressures accelerated for highly skilled workers and were “fairly modest” for most workers, the beige book said, and price inflation was “modest.”
Steve Murphy, U.S. economist at Capital Economics, said the rise in job openings in the professional business services sector could reflect a skill shortage.
“If that’s the case, then we can expect an unprecedented surge in that sector soon,” he said, noting those jobs pay around $31 an hour, higher than the national average of roughly $26
A sustained high level of openings could presage meatier pay raises in the future for a broader set of workers, economists said. But for the moment, it could signal firms’ reluctance to make better offers to lure the right candidates.
“As long as firms don’t make offers that prospective employees cannot refuse, the number of job openings will continue to rise and likely outstrip hiring. That will increase the number of unfilled positions and ultimately put more upward pressure on wages,” said Joel Naroff of Naroff Economic Advisors.
According to the beige book, that breakout in wages may not be immediately forthcoming. “In general, expectations of wage growth for the coming months were modest,” it said.
Still, hiring isn’t everything. Firms also have to invest in machinery and equipment to boost workers’ productivity for the economy to see more sustainable growth. Business investment could boost worker productivity and corporate profits, both of which have been anemic in recent months. But companies have largely sat on the sidelines in the midst of an unusual U.S. election season and uncertain global demand. Ms. Yellen has cited soft business investment as a concern.
Instead, the economy relied in the second quarter on consumers to keep it afloat. Consumer spending was little changed in most districts over the reporting period, the beige book said. Five districts reported a slight slowdown in auto sales. Car sales hit a record in 2015 and have remained high, but it is unclear whether that pace of buying is sustainable.
Most districts reported a slight rise in manufacturing activity. The sector had appeared to stabilize for much of the spring and summer, although a report last week from the Institute for Supply Management signaled the factory sector contracted in August.
Housing activity, another mainstay of the economic expansion, continued to grow, but the report noted a limited supply of homes was weighing on the pace of sales in some districts. Commercial real estate activity also continued to expand.
The report said sales of nonfinancial services accelerated over the time period covered, with growing demand at restaurants, for health care and for staffing services. But an index of service-sector activity posted a sharp drop in August to its lowest reading in more than six years, the Institute for Supply Management said Tuesday. Still, the sector — which accounts for the bulk of U.S. jobs — continued to grow in August, albeit at a slower pace than in July.
Bankers reported credit quality remained “favorable” in most districts. Loan demand grew at an overall moderate pace, although it varied widely between districts. In Dallas and Kansas City, “some oil and gas companies reported challenges obtaining credit.” That dovetailed with declining demand for energy-related products in the reporting period, although the report noted “some signs of stabilization.”