The “true” pace of AHE growth is 3.5%-4% (ar). Last month, our model suggested that the April AHE reading was “not so soft” and that the “true” pace was 3.5%-4.0% (ar). Indeed, in May, AHE grew 40bps, even a bit stronger than the model forecast (33bps). Controlling for shifts in employment across sectors, slack, and “residual calendarity”, our AHE model continues to suggest that the “true” sequential AHE pace is around 4% (ar).
Note: the model expects another strong 0.4% (36bps) MoM AHE reading in June. See below for details.
(A PPT containing all US wage charts has been updated and posted here)
The facts
Strong Average Hourly Earnings. In May, the 40bps MoM (sa) reading of AHE was a bit stronger than the model and the markets expected (33bps). As anticipated last month, according to our model, the reason of the MoM rebound compared to April is the negative serial correlation of the series and the fact that the residual seasonality effect was neutral in May.
Note: if the reader is unfamiliar with the notion of “residual calendarity” in AHE space, (s)he can refer to this BLS page, and to our previous notes here, here, and here.
The AHE model
The “true” AHE pace continues to be around 3.5%-4.0% (ar). Figure 1 shows an update of our AHE monthly model. As a reminder, this model explains monthly AHE growth rates using recent past, a variable capturing “residual seasonality”, a variable capturing economic “slack”, and sectoral employment shares. In May (latest point on the chart), the fitted value of the model is a bit below the published AHE growth rate, as the model attributes part of today’s reading to noise.
We continue to take the blue line as the “true” signal, given it has provided good guidance so far. The overall message has not changed: the fitted values (blue line) are gently disinflating, although in the last year or so we have basically moved sideways.
(The reader can see the 3m/3m and the MA(3) of the MoM of the fitted values here).
Figure 1. AHE MoM (sa) and UnderlyingInflation AHE model fitted values.
Note: the figure shows published MoM (sa) AHE growth rates (red line) and UnderlyingInflation AHE model fitted values (blue line). The figure excludes the first 6 months of Covid for scaling issues (although they are included in the model estimation).
Why sectoral shifts are crucial. We often get the following question: how important are sectoral employment shifts for AHE growth? Figure 2 clarifies why it is very important to control, somehow, for sectoral employment shifts. Figure 2 shows the published AHE YoY growth rate (the yellow line), and the share of employment in industries with AHE level above the aggregate mean. Figure 2 is not meant to say that industry shifts can explain everything. Rather, it is just a reminder not to take at face value the MoM (or YoY) of AHE when it pops up on your Bloomberg terminal.
Figure 2. YoY of AHE and Sectoral Employment Share.
What to expect next month
Another strong AHE in June. According to the model, AHE MoM (sa) growth in June is expected at 0.36%. Please, remember that the model assumes no shift in employment shares across sectors and constant aggregate hours (we cannot forecast the weather..). The reason of the strong reading is, once again, “residual calendarity”: June has 10 weekend days vs 8 in May. Conditional on this forecast, the “true” AHE growth rate (blue line in Figure 1) would continue to be around 3.5%-4.0% (ar).