While U.S. wage growth cooled in the waning months of 2019, UBS believes workers still “hold sway” over their paychecks — and could have even more power if tensions between the U.S. and Iran push up energy prices.
At least for now, markets are discounting the potential for an energy shock. Oil shot higher in response to the Iranian retaliatory strike against U.S. bases in Iraq, but completely reversed once it became apparent that President Donald Trump wouldn’t respond with military force.
However, tensions between the U.S. and Iran are unlikely to go away, as evidenced by Friday’s news that the Trump administration would slap a new round of sanctions on Tehran. While it’s unclear how Iran will respond, crude is likely to become a proxy of investor fears about renewed clashes between the two countries.
According to Paul Donovan, chief economist at UBS Global Wealth Management, another jump in oil prices for a sustained period of time could lead to higher wages for U.S. workers.
While UBS doesn’t expect this week’s oil spike to last — indeed, Brent crude (CL=F) sank to near $59 per barrel on Friday after skyrocketing above $65 just days ago — the firm noted on Friday that “oil does affect consumers, because consumers think inflation is only about food and fuel. We do not think the recent oil price increase will last.”
In Donovan’s thinking, “One possibility now is that if the price of crude oil goes up for a sustained period, that then leads to higher inflation perceptions,” he told Yahoo Finance in an interview. Higher crude also puts upward pressure on gas prices.
Against that backdrop it may lead to “workers going in and saying actually I would like to see a pay rise please,” he added.
December’s jobs report suggests that workers may start clamoring for higher pay sooner rather than later.
Not only did job creation fall short of Wall Street’s estimates, several economists pointed out that wage growth lost momentum in the waning months of 2019. And although the labor market remains tight and the unemployment rate is steady at a 50-year low at 3.5%, wages have remained relatively flat.
JPMorgan Chase economist Michael Feroli, noting that average hourly earnings fell to 3.0% in December from 3.6% in October in the production and nonsupervisory worker series category, called the deceleration in wage growth “mysterious.”
UBS’s Donovan surmised that consumers -- prompted by concerns about fuel prices on their tight budget -- could feel compelled to ask their bosses for a raise. He pointed out that workers are in a better position now than they were during the crude price spike in 2011.
At that time, “U.S. labor market [was] still relatively weak. We [were] just coming out of the global financial crisis,” Donovan said.
“This was not a time when you [were] gonna go to your boss, pound the table and say it’s costing me more to buy gasoline give me a pay rise,” he added. “You [didn’t] have pay bargaining power.”
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