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CNN Business
 — 

Investors, economists and members of the Federal Reserve will be poring over the September jobs report on Friday morning for clues about the health of the economy. But one figure may matter more than most…and it’s not the number of jobs added or the unemployment rate. It’s wage growth.

Inflation is not just a function of the price of oil and other commodities and production costs like manufacturing and shipping. How much workers take home in their paychecks is also a big part of the inflation picture.

When people have more money in their wallets (virtual or good old-fashioned leather ones), they tend to be more willing to spend it. That gives companies additional flexibility to raise prices.

Average hourly wages rose 5.2% over the past 12 months according to the August jobs report. That’s down from a 2022 peak growth rate of 5.6% in March.

So how aggressively will the Fed need to raise rates going forward? A lot will depend on whether wage growth continues to slow.

Companies can’t raise prices as much if workers are making less or they risk big destruction in demand.

The problem is that wage growth above 5% is still historically high. Before the pandemic, wages typically rose just 3% year-over-year. But labor shortages, due to Covid-19 and people dropping out of the workforce, shifted power from employers to employees when it came to worker pay.

That’s another reason why companies have continued to raise prices: To offset rising costs.

The government reported Friday that its preferred inflation metric, personal consumption expenditures (PCE), rose 6.2% from a year ago in August. That was lower than July’s reading.

But the so-called core PCE figure, which excludes food and energy prices, rose 4.9% through August, up from a 4.7% increase in July.

What’s more, the Fed typically is looking for just a 2% growth rate in the headline PCE number as a sign of price stability. That’s not going to happen anytime soon. In fact, the Fed’s latest forecasts suggest that the central bank thinks PCE will rise 5.4% this year, up from projections of 5.2% in June.

“I don’t see anything in the near-term to give the Fed tons of comfort that inflation is on the trajectory to 2%,” said David Petrosinelli, senior trader with InspireX. “Wages will remain elevated and that will keep the Fed in a pickle.”

But there’s another concern. Wages, while still rising, are not actually keeping pace with the increase in consumer prices. You don’t need to be a math genius to realize that 5.2% is less than 6.2%.

“Wages are a real pain point. People are paying more but not making more,” said Marta Norton, chief investment officer of the Americas with Morningstar Investment Management. With that in mind, Norton said there is a “higher probability of stagflation.”

Stagflation is the nasty economic combination of stagnant growth and persistent inflation.

Retail sales have held up relatively well despite inflation pressures, but Norton warns that can’t last forever. American shoppers would eventually reach their breaking point and just start buying essentials. A slowdown in consumption will inevitably lead to lower prices…but also slower economic growth.

“Inflation is its own cure. Consumers have the power to spend or not spend,” she said.

The third quarter is mercifully over. It’s been another doozy for the market. September in particular was bleak. It was the worst month for the Dow since the start of the pandemic in March 2020.

But even though we’re seemingly in a bear market for everything as bonds, gold and bitcoin have all tumbled this year as well, there are some hopeful signs for the next few months.

The fourth quarter is typically a festive time on Wall Street. Investors tend to buy stocks in anticipation of robust consumer shopping during the holidays. Businesses typically spend more as well to flush out those yearly budgets. And major companies also often give rosy guidance in October about earnings expectations for the coming year.

“October has been a turnaround month—a ‘bear killer’ if you will,” said Jeff Hirsch, editor-in-chief of the Stock Trader’s Almanac, in a recent blog post.

Hirsch added that a dozen bear markets since World War II have ended in the month of October. And of those twelve, seven market bottoms happened during midterm election years.

Traders will definitely be keeping close tabs on Washington this fall to see if Republicans gain control of the House. That could lead to more gridlock in DC, which investors tend to like.

Whether or not Corporate America and investors are going to be so bullish this October is up for debate given the concerns about inflation, interest rates and the global economy. After all, October is also famous for huge crashes, most recently in 2008 but also in 1987 and, of course, 1929.

So stocks definitely could take another turn for the worse. But experts are hopeful that the end of the bear market is in sight.

“We’re nearer to a bottom,” said Christopher Wolfe, chief investment officer of First Republic Private Wealth Management. “A lot of quality companies are on sale. It’s a time to be patient and reposition.”

Monday: US ISM manufacturing; China stock markets closed all week

Tuesday: US job openings and labor turnover (JOLTS); Japan inflation; Australia interest rate decision

Wednesday: US ADP private sector jobs; US ISM services; OPEC+ meeting

Thursday: US weekly jobless claims; earnings from ConAgra

(CAG), Constellation Brands

(STZ), McCormick

(MKC) and Levi Strauss

(LEVI)

Friday: US jobs report; Germany industrial production; earnings from Tilray

(TLRY)