Businesses revise their expectations for wage and price growth in 2021.
Texas business executives expect to hike wages this year at an annual rate of 4.7%, outpacing official forecasts for inflation this year and pointing to price pressures ahead.
Compared to just a few months ago, inflation and wage expectations have risen among surveyed business executives. The Texas Business Outlook Survey in December showed an average forecast of 4.3% for wage growth, before jumping to 4.7% in April.
Texas executives expect input prices to rise even faster this year, by a rate of 5.5%. In the same survey in December, they forecast an increase of only 3.7%.
That’s according to 376 executives surveyed by the Federal Reserve Bank of Dallas.
Growth expectations for selling prices, a closer proxy for consumer prices, rose to 4.3% in April, compared to a forecast of 3.4% four months earlier.
“Amid surging optimism and waning uncertainty, businesses upwardly revised their expectations for wage and price growth in 2021,” said Dallas Fed economist Anil Kumar and research analyst Judy Teng in a research note today.
“Increased economic activity has led to concerns about hiring. Nearly two-thirds of businesses trying to hire workers reported a lack of applicants as an impediment, with nearly half of those citing generous unemployment benefits as an obstacle.”
If the forecasts in the Texas Business Outlook Survey turn out to be accurate, wages in Texas would rise at more than twice the consensus inflation forecast by Federal Reserve governors. At their March meeting, the central bankers gave a median forecast of 2.2% core PCE inflation (which excludes food and energy prices) and 2.4% non-core PCE inflation.
Similarly, the White House Council of Economic Advisors expects “muted growth in average wages for the rest of this year, with the possibility that wage growth turns negative,” due to “base effects and compositional effects” — a reference to more low-wage workers losing their jobs.
A large discrepancy between wage growth and inflation would be unusual, since the two tend to be strongly correlated. This suggests that one forecast or the other is likely inaccurate.
The differing outlooks between Washington policymakers and Texas executives may reflect different experiences of daily life during the pandemic, and differing data for different geographies. In the Northeast, Midwest, and West Coast, pandemic restrictions have been tighter than in Texas, which fully reopened more than two months ago.
Through most of last year, Texas imposed fewer restrictions on restaurants, bars, and retailers, and schools in Texas have been open since last fall.
Lower growth expectations may be weighing on wage forecasts in other parts of the country. For instance, business executives in Pennsylvania, New Jersey, and Delaware forecast wage growth of 3–4%, lower than their Texas counterparts, according to an April survey by the Philadelphia Fed.