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Wage growth is continuing to accelerate and likely will start eating into corporate profit margins before the end of the year, according to Goldman Sachs.

December’s nonfarm payrolls report dented what had been an otherwise solid employment picture through 2019. Specifically, average hourly earnings growth of just 2.9% from the same period a year ago marked the first time that metric had been under 3% since July 2018.

More importantly, it sent a signal that an expansion, which had added nearly 15 million jobs since the Great Recession ended, finally might be sputtering.

Not so, says Goldman, which expects the unemployment rate to continue to drop and for the December wage number to be an aberration unlikely to persist.

“We find that there actually is no wage growth puzzle, as much of the recent slowing reflects noise in the average hourly earnings measure unrelated to the underlying trend, including less favorable calendar effects,” Goldman economist Daan Struyven said in a note.

Federal Reserve policymakers have been watching the wage situation closely as they ponder why inflation has remained so low during the longest economic expansion in U.S. history and record-low unemployment rates. Central bankers follow the Phillips Curve, which indicates that low unemployment generally pushes wages higher. Some economists question whether the curve is still valid considering the trend in recent year.

But Struyven said the Phillips Curve “is alive and well” for a variety of reasons.

Why wages will rise

The calendar made a significant impact on that December hourly earnings number, he said. An increase in the number of workdays for the month from November coupled with a sample week for the government payrolls count that traditionally turns in lower numbers both conspired to bring down the wage gain.

Goldman’s analysis indicates that earnings growth is still in the 3.25%-3.5% range, and should be solidly around the latter number by the end of the year. The firm expects the unemployment rate, currently at 3.5%, to drop to close to 3%, a level it hasn’t broken since 1953.

“At the heart of our wage growth (and inflation) forecast is a view that declining slack will significantly boost wage growth,” Struyven wrote. “This further acceleration in wage growth should put upward pressure on core PCE inflation, which we expect to rebound to just below 2% by year-end, and downward pressure on profit margins.”

The forecast comes form using a variety of other indicators besides the Labor Department’s establishment survey.

In addition to the department’s average hourly earnings calculation, it also calculates median weekly earnings, which rose 4% during the fourth quarter. Goldman also incorporates the Atlanta Federal Reserve’s wage tracker, which was up 3.7% in December, as well as compensation per hour, a measure of wages and benefits, which also rose 3.7% in December and was up 1.9% adjusted for inflation.

Those numbers reflect a tight labor market where job openings fell in November to their lowest level since February 2018 but still outnumber the unemployed by a million.

“We do think that the labor market will remain strong, and that increased hiring will continue to put upward pressure on wages,” said Daniel Zhao, senior economist at job search and review site Glassdoor. “We’re already seeing wage growth for low-income workers where the labor market is tighter grow faster than average workers. That’s indicative of a labor market that already very tight in specific areas.”

Retail pay, for instance, has been a growth area for salaries, rising 5.1% in December from a year ago, according to the Bureau of Labor Statistics. Mining and logging pay was up 5.3% and leisure and hospitality rose 3.1%.

Zhao also said he thinks a data “blip” in December accounted for the low reading.

“Ultimately, we think that wage growth will take off in 2020 as long as the demand remains strong,” he said.

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