All eyes turn to the Federal Reserve on Wednesday, then to President Trump on Thursday for his announcement of Chair Janet Yellen’s successor. But the biggest economic news of the week may already be out.

XAutoplay: On | OffDaily Treasury statements show that federal income and employment taxes withheld from worker paychecks are now growing at 6% from a year ago, according to an IBD analysis. That’s the best sustained rate of growth since early 2008.

The data reflect growing wage pressures and signal that 3% wage growth may finally have arrived. That’s a threshold that will signal to the Fed that price inflation pressures are beginning to build, though it may take a while for higher inflation to materialize.

Markets see virtually zero chance of a rate hike on Wednesday, with the only Fed news likely to be its recognition of stronger growth amid tepid inflation, reinforcing expectations of a December move. Fed Gov. Jerome Powell, who is expected to get the nod from Trump, is seen as a status-quo candidate, as far as monetary policy is concerned.

The tax receipt data, which offer the broadest, most timely read on the health of the labor market, are consistent with what companies are saying and doing. Target (TGT) announced last month that it’s hiking its minimum wage to $11 an hour this month as it recruits 100,000 seasonal workers. Target eventually plans to raise its minimum wage to $15.

Greg Levin, CFO at BJ’s Restaurants (BJRI), which has 195 locations in 25 states, said on an earnings call last week, “I was kind of surprised, frankly, at some of the challenges on hourly labor wage rates in the fourth quarter. Before that we were kind of more in the 4% range, and it spiked up closer to 5%.”

On a Sept. 19 call, AutoZone (AZO) CEO William Rhodes said the auto parts retailer, with 5,300 stores across the U.S., has “experienced accelerated pressure on wages significantly more than I have experienced in my nearly 23 years of AutoZone.”

Brink’s (BCO) CEO Doug Pertz noted in an earnings call last week that third-quarter profits were hurt by “significant wage adjustments in key markets that have been experiencing very tight and highly competitive labor conditions,” according to a Seeking Alpha transcript.

Pertz said the move to reduce turnover among truck drivers and messengers came in response to “unemployment rates that are getting to full employment type of levels, and specifically when you’re competing against Amazon (AMZN) and others in the area that the markets were improving.”

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Management at the cash management and security company said fourth-quarter price hikes have pushed some of those higher wage costs on customers, evidence of pricing power that isn’t present in most areas of the economy. Target’s big wage hike, by contrast, came just weeks after it announced broad price cuts, which appeared to be a response by price cuts by at Whole Foods Markets right after closing its acquisition.

The growth in federal withheld taxes reflects job gains, hours worked and both incentive and regular pay. Given that total hours worked in the economy are growing about 2% from a year ago, according to Labor Department data, 6% growth in withheld taxes points to a likelihood of 3% wage growth. However, because the data reflect income from commissions and other incentive pay, as well as changes in tax code parameters each year, the data don’t lend themselves to precise analysis.

The spike in tax withholdings in the spring reflected, in large part, an apparent slow start and strong end to bonus season. Bonuses must be paid by March 31 to be counted in the prior year’s tax filings.

The September job’s report showed the average hourly wage accelerating to 2.9% from a year ago, though that may have been slightly inflated by the temporary disruption of low-paying jobs due to hurricanes. Wall Street economists expect wage growth to backslide to 2.7% in October, when the monthly employment report comes out on Friday.

While there’s good reason to expect an upside surprise on wage growth on Friday, there’s also reason not to. That’s because wage growth often comes in deceptively weak when the Labor Department’s survey week doesn’t include the midmonth pay period, which was the case in October.


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