Americans Are Earning More Money

Americans are making more money, government data showed on Thursday, in what analysts say is a sign of a strong labor market with employers still looking to hire workers and pay them a decent wage despite an environment of elevated interest rates.

The nearly 121 million workers in the U.S. earned about $1,145 a week in the fourth quarter of 2023, according to the U.S. Bureau of Labor Statistics, a 5.5 percent jump from the same time last year.

The ability of workers to command high pay explains why the U.S. economy has held up despite the Federal Reserve hiking rates at their most aggressive pace since the 1980s in a battle to fight inflation to the current range of 5.25 percent to 5.5 percent, a two-decade high. The rise in rates has helped push up borrowing costs including for business investment, which some experts said would have cooled hiring and slowed down wages.

But employers have continued to recruit workers and Americans have continued to spend illustrating a resilience in the economy that has also buoyed wages.

On Thursday, jobless claims fell to their lowest since September 2022, according to the Labor Department, and data on retail spending rose by 0.6 percent, showing Americans splurged on a broad base of goods and services and, in the process, injected hundreds of billions into the U.S. economy. The unemployment rate stayed at 3.7 percent in December as employers added 216,000 workers.

"Consumers have proven that they can weather what the Federal Reserve is throwing at them. Wages is part of that," Meagan Schoenberger, a senior economist at KPMG, told Newsweek.

The strength of the labor market and high wages suggests that the economy may achieve a soft landing, some economists say, meaning that inflation will decline to the Fed's target of 2 percent—inflation in December came in at 3.4 percent—without significantly damaging the economy and the jobs market.

"Strong wage growth holistically just really supports our view that we should be able to avoid a recession and the economy should remain pretty strong, even if it does slow down somewhat in 2024 compared to last year," Mahir Rasheed, a senior economist at insurance firm Swiss Re, told Newsweek.

The economy showing resilience suggests that rate cuts will remain elevated for a while longer, as Fed policymakers look to retain a tightened monetary policy to bring down inflation. At their last meeting in December, the central bank held rates for the third in a row.

Some Fed officials have indicated that they will look to keep rates elevated until inflation moderates to target. This week Fed Governor Christopher Waller suggested that inflation was on target and the central bank may cut rates.

"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," he said in a speech. "With economic activity and labor markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past."

Should rates remain elevated for longer, that could slow down wages, economists told Newsweek.

"We do expect the Fed to hold higher, at least until later in the spring, and that continued tightness, particularly in real interest rates because inflation is going to come down as they hold interest rates higher, to cause some softening in the labor market," Schoenberger said. "We don't expect a significant rise in the unemployment rate by by any stretch of the imagination but that unwinding is likely to soften wages."

Rasheed suggested with employers still looking to hire workers, even with some slowdown of the economy he expected wages to remain elevated. He estimated that wages may not hit the 5.5 percent levels seen in the fourth quarter of 2023 but could rise to about 4 percent this year. Even as the labor market cools, hiring looks to continue in 2024 supporting higher wages.

"We think this year wages will still remain a little bit elevated," Rasheed told Newsweek.