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Wage Growth and Services Slow

Overview: Weakness in key data on wage growth and the services sector released over the past week raised investor hopes that inflation may be falling faster than expected. As a result, mortgage rates ended the week lower


Large wage increases are fantastic news for workers, especially during periods when prices are rapidly rising. For mortgage markets, however, they are unfavorable, since this raises future inflationary pressures. In the December Nonfarm Payrolls report, average hourly earnings, an indicator of wage growth, were 4.6% higher than a year ago. This was far below the consensus forecast of 5% and the lowest level since August 2021. While this remained far above the levels typically seen for many years prior to 2022, the weaker than expected data was good news for mortgage rates.

The other major components of the Nonfarm Payrolls report were much closer to the expected levels. The economy gained 223,000 jobs in December, a little above the consensus forecast of 200,000, but still the smallest monthly increase in two years. The strongest sectors were leisure, hospitality, and medical services. The unemployment rate fell from 3.6% to 3.5%, matching the lowest level in decades.

Another significant economic report released over the past week came from the Institute of Supply Management (ISM) and suggested slower growth in the large services sector of the economy. The ISM Services Index dropped to 49.6, far below the consensus forecast, and the lowest reading since May 2020. Levels below 50 indicate that the sector is contracting. As the economy reopened following the pandemic, consumers had been steadily increasing their spending on services, but recent data suggests that the trend has reversed.


Average Earnings (annual rate)


Week Ahead

January 12

Consumer Price Index (CPI)

January 18

Retail Sales report


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