Wage Growth Slowed in Second Quarter, a Sign the Economy is Cooling

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So far, that is exactly what is happening. Wage growth, by various measures, has softened in recent months, but inflation has fallen by even more. Workers are better off as a result: Pay, adjusted for inflation, rose in the second quarter for the first time in two years. “Households are getting back some purchasing power,” said Beth Ann Bovino, chief economist for U.S. Bank. Still, many economists argue wages are still rising too quickly for the Fed’s comfort, particularly in certain sectors such as leisure and hospitality. If compensation costs keep rising at their recent pace, companies are likely to keep raising prices — especially if consumers prove willing to keep spending anyway, as they have recently. “At the end of the day, if the wage bill is rising at between 4 and 4.5 percent, it will be hard for the Fed to have confidence that services inflation will be consistent with their preferred outcome,” said Michael Gapen, chief U.S. economist for Bank of America. The slowdown in wage growth has surprised some economists because the unemployment rate remains very low, which ordinarily would put pressure on companies to raise pay to attract and retain workers. But other evidence suggests that the labor market has softened even without a big increase in joblessness. Employers are posting fewer job openings, are adding fewer new jobs and are poaching fewer employees from competitors, all signs that demand for workers has slowed. At the same time, the supply of workers has increased, as immigration has picked up and more people are coming off the sidelines to join the labor force.