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Why some experts are saying disappointing wage growth is a good thing

The December jobs report highlighted disappointing wage growth data, showing average hourly earnings rose by only 2.9% over the prior year and dipped below 3% for the first time since July 2018.

Slowing wage growth doesn’t help workers who may be struggling to make ends meet. However, some experts noted that this phenomenon is a positive for corporations and those invested in stocks.

“In a way, though, this slow wage growth is a good thing, and so is this modest pace of payrolls expansion,” Moody’s Chief Economist John Lonski told Yahoo Finance’s The Ticker. Non-farm payrolls rose by 145,000 in December, missing expectations for 160,000 and coming in below 2019’s average of 176,000 jobs added per month.

“It is telling me that corporations are not rushing to hire workers, rushing to pay higher wages, and that is, add to employee compensation costs in a manner that might be regretful later on if this anticipated increase by business sales fails to materialize,” Lonski said.

In other words, slowing hiring and average hourly earnings growth mean companies are paying fewer employees just modestly higher wages, alleviating a source of pressure on corporate profitability.

‘Not much pressure on margins’

This trend hasn’t been condensed to a single industry or job level. December’s slowdown in average hourly earnings growth was broad-based, with construction, manufacturing, education and health services and leisure and hospitality industries reporting the slowest wage gains. Both supervisors and non-supervisors saw wage growth cool.

“The important point here is that there is not much pressure on margins from this report,” Neil Dutta, head of economics for Renaissance Macro Research, said in an email Friday.

His takeaway?

“Buy stocks,” Dutta said.

Average hourly earnings rose 2.9% over last year in December. (Photo Illustration by Thomas Trutschel/Photothek via Getty Images)

And aside from the headline wage growth results, aggregate hours worked rose at a seasonally adjusted annual rate of just 1.1% in the fourth quarter, while U.S. GDP is tracking above 2% for the same period, Dutta added. Taken together, this reflects an increase in productivity and decrease in unit labor costs, which would further support stronger corporate earnings.

And better bottom-line results would be welcomed this year, especially since last year’s tremendous 29% gain in the S&P 500 was underpinned mostly by multiple expansions rather than stellar earnings growth.

“Corporations, you know, they’re even skeptical with what’s going on with equity prices,” Lonski said. He cited a recent Deloitte finding that 77% of surveyed chief financial officers believed the equity market was significantly overvalued.

“So perhaps this is time for a bit of caution on the hiring front as far as labor compensation is concerned,” Lonski said.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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