'Data Dependent' Fed Eyeing GDP Revision

The news keeps getting better and the “data dependent” Federal Reserve is definitely paying attention.

On Wednesday the Commerce Department said the economy still shrank during the first quarter but not by as much as previously believed. The reason for that upward revision – from a contraction of 0.7% to a contraction of 0.2% -- is especially positive: Consumers, prompted by a strengthening jobs market and rising wages, spent more than previously reported.

It’s that latter element – the rising wages – that will undoubtedly intrigue Fed policy makers as they mull the timing of the first rate increase in nearly a decade, a long-awaited policy shift that seems increasingly likely at the central bank’s next meeting in September.

“This less downbeat view stems from an increased estimate of consumer spending across goods (both durable and nondurable) and services,” Nariman Behravesh, chief economist at IHS Global Insight, said.

To that point, Gregory Daco, head of U.S. Macroeconomics at Oxford Economics said although GDP remained in negative territory, activity is bubbling beneath the surface.

“Faster wage growth and strong employment will support a private sector activity rebound in the coming quarters,” he added.

Beyond the headline numbers, the data suggest broad-based growth will escalate during the second half of the year.

Wages on the Rise -- Finally

Notably, consumer spending, which accounts for nearly 70% of the U.S. economy, grew at a 2.1% rate in the first quarter, slightly higher than the previous estimate of 1.8%. While the new reading is sharply lower than the fourth quarter’s 4.4% pace, economists believe rising wages and lower energy costs will lift economic growth through the rest of the year.

Stagnant wages had vexed economists for months, especially those at the Fed eager to normalize U.S. monetary policy after years of unprecedented stimulus in the wake of the 2008 financial crisis.

The rapidly falling unemployment rate allowed the Fed last fall to phase out quantitative easing, the central bank’s program of monthly bond purchases. But inflation that has remained stubbornly below the Fed’s 2% target rate has prompted cautious central bank members to hold off on raising rates above the 0%-0.25% range where they’ve been held for six and a half years.

Economists have said inflation has remained low despite the rapidly falling unemployment rate because too many workers were either employed part-time or had dropped out of the workforce altogether. Until this ‘slack’ tightened, employers had no reason to raise wages.

Now, that slack is apparently tightening. Earlier this month the Labor Department reported that the number of job openings at the end of April stood at 5.4 million, the largest number since the government started keeping track in late 2000. Meanwhile, hiring fell to 5 million in April down from 5.1 a month earlier, a drop economists said occurred because employers are having difficulty finding the qualified workers they are seeking.

Add to that the 280,000 new jobs in May and it’s not surprise that wages rose by 2.3% last month from a year ago. It’s not the 3% wage growth that the Fed sees as necessary to move inflation higher, but it’s a real good start.