The U.S. economy passed the second of three tests before the Fed meets in December to consider resuming interest rate hikes. In October, 161,000 jobs were created nationwide, modestly below projections for 175,000 positions. Although the headline figure missed expectations, revisions to August and September added 44,000 jobs to bring those months up to 176,000 and 191,000 new positions, respectively. The Fed set a hawkish tone following their November meeting, and all signs point a rate hike that will put upward pressure on interest rates.
The largest wildcard facing the financial markets is the presidential election. Wall Street has firmly backed a Clinton administration as swings in polling have rippled through the equities markets. Relatively strong employment gains in October bode well for a Clinton win, as recent changes in control of the White House have often coincided with economic turmoil. If the current election cycle proves anything, it’s that history can be difficult to rely upon. Still, politically split executive and legislative branches keep wild swings in fiscal policy from occurring regardless of which party holds an advantage in each branch, an environment Wall Street has generally supported.
Digging deeper into the Bureau of Labor Statistic’s jobs release, wage growth soared 2.8 percent year-over-year, nearly double the inflation rate. The jump in wages is the largest since the U.S. emerged from the Great Recession, and has been repeatedly mentioned as a concern for the Fed. Higher wages are anticipated to continue into 2017 as the overtime exempt threshold doubles on Dec. 1 to nearly $48,000. Approximately 4 million workers will become eligible for overtime with the change. With the economy expanding, many employers will either increase employees’ salaries or pay overtime wages rather than taking on additional workers.
For operators of investment properties, strong job and wage growth is a welcome sign. In many areas, rents have been bumping up against a ceiling absent more significant wage growth. The increase in wages is unlikely to shift renters into ownership as many other factors are in play, leaving landlords in a strong position to capture a share of higher wages as rents continue to climb. Rising interest rates will also claim a share of higher wages assuming the 80 percent chance of a rate hike holds up in December. Between higher borrowing costs, rising rents and inflation, wage growth is insufficient to siphon demand away from the rental pool.