US wage inflation moderates, boosting the odds of a soft landing

US wages grew at the slowest pace in two years in a sign that the US could avoid the recession for which economists have long been bracing.

The average US worker earned $34.57 an hour in February, up just 5 cents from January, the US Bureau of Labor Statistics reported March 8. The gain is the smallest since the 2-cents-per-hour rise in February 2022 from a month earlier.

Wages surged in January, stoking fears of higher inflation growth and additional monetary policy tightening from the Federal Reserve. However, cooling wage growth in February could bolster the case for rate cuts from the Fed later this year and boost the odds of a so-called soft landing, where the US avoids a recession despite one of the most aggressive interest rate hike cycles in generations.

"It's clear that the trend in wages seems to be moderating," said Michael Arone, a chief investment strategist at State Street Global Advisors. "The labor market is cooling but at a comfortable pace."

Overall, wages increased 4.3% year over year in February, down from the 4.7% annual growth in February 2023, according to government data.

"The structural imbalance in the labor market between the supply of labor and the demand for labor are getting in better balance," said Arone with State Street. "That's exactly what the Fed wants to see."

The cooling in wage growth could increase the likelihood of a rate cut from the Fed later this spring even as wage growth likely persists due to more job openings than job seekers. There were 8.86 million job openings in January, about 2.4 million more positions than there were unemployed job seekers, according to the latest government data.

"My expectation is that the trend in earnings is more likely to be flat than sharply down over the coming year," said Aaron Terrazas, chief economist at Glassdoor.

Since the start of 2024, there has been some pickup in hiring at their higher-paying end of the labor market, which Terrazas sees continuing as companies that implemented hiring freezes in 2023 will likely start cautiously hiring again as recession fears recede. But workers on the other end of the labor market, including front service and skilled vocational trade workers, will see a tighter, more competitive market, Terrazas said.

"It's more of a buyer's market for brains, but still very much a seller's market for brawn," Terrazas said.

This can be seen with financial activities workers, who saw an annual increase in wages of 5.8% in February 2024, compared to 4.3% in February 2023. In contrast, leisure and hospitality workers saw a 4.7% annual increase in wages in February 2024, compared to 6.7% a year earlier.

Much of the slowdown in wage growth from January to February was due to winter storms in January, which caused a decline in the number of hours worked, said James Knightley, chief international economist with ING.

Still, the rate of workers quitting suggests that the millions of job vacancies in the labor market are not particularly attractive for job seekers, Knightley said. The quits rate, which is the number of quits as a percentage of total employment, fell to 2.1% in January, the lowest level since August 2020.

"This has a knock-on effect in that if there is less labor market churn there is less need for an employer to pay up to retain staff and suggests inflation pressures emanating from the jobs market will continue to ease," Knightley said.