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Fed Gets Mixed Signals from Economic Indicators as Housing Inflation Finally Dips

Wage Growth Concentrated Among Lower-Income Workers

By Louis Rosenthal | Friday, August 11, 2017


Like a co-dependent relationship, economic indicators are sending mixed signals to Fed officials grappling with a looming decision on future interest rate increases.

These signals include:

  • A muted overall inflation rate seemingly allergic to the Fed’s target.
  • An unrestrained housing inflation rate that has finally begun to dip in the face of growing apartment inventories.
  • Employment and wage growth gains concentrated among the lowest earners.

The unemployment rate, at 4.3% in July, is now well below the natural rate of 5.0%, but inflation is remarkably restrained. Historically, as unemployment falls, wage pressure builds as labor becomes scarcer, and inflation rises. However, since the Great Recession ended, inflation surpassed the Fed’s target only in early 2012. Both indicators fell by about half a percentage point between January and May. We are using the Fed’s primary measure of inflation, the personal consumption expenditures price index.

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Housing inflation, on the other hand, has not shown such restraint with housing costs growing, on average, by more than 3% per month (annualized) since the start of 2017. If we removed housing inflation from the equation, the overall inflation rate would be even lower than it is today.

Comparing the inflation rate (this time using the more traditional consumer price index) against housing inflation alone, it’s clear that after a year of compression between the two rates, housing inflation soared in early 016 and has only recently begun to tick downward. This moderation in housing inflation partially reflects the downward pressure on rent growth, which has itself moderated in the face of growing new supply levels and the sheer number of properties in lease-up in major markets.

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If the inflation rate is underperforming the Fed’s expectations, the same cannot be said for the unemployment rate. As expected, falling unemployment is boosting wages, but the primary beneficiaries of wage growth are, as of late, low-income earners. Whereas the unemployment rate for all workers fell by half a percentage point since last year, it fell by over one percentage point for workers without a high school diploma.

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And, starting in the second quarter of 2016, the lowest decile income earners have seen the fastest wage growth. The top decile earners, on the other hand, are seeing wage growth below that of median earners.

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In fact, we can attribute the strength of low-income earners’ wage growth in recent quarters to the broader economic recovery, which has led to more spending, particularly on services, which has increased demand for lower-educated workers in these industries, thereby boosting their own spending power.

For the apartment market, an interest rate increase would likely lead to higher borrowing costs, but with little impact on cap rates as outlined on our Forbes blog. If anything, a rate hike would suggest confidence in the broader economy, which is partially reflected in the pace of job gains (a key indicator of demand for apartments).



Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on and Axiometrics’ blogs, among others.

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