Dive Brief:

• Employers trimmed the average increase in salary budgets this year to 3.6% from projections in November of 3.8% as they saw more stability compared with the job churning during the pandemic period’s “Great Resignation,” Mercer said.
• Companies also plan to promote 8% of their workforce in 2024 compared with 10% last year, Mercer said, describing results of a survey. They have budgeted 9.2% pay increases for promoted employees, down slightly from 9.4% in 2023.
• “While preliminary compensation budgets for 2024 have shown a slight decline, they still remain significantly higher than pre-pandemic levels, reflecting the continued tightness of the labor market and low unemployment rates,” Michael Citron, a compensation and rewards consultant at Mercer, said in an email response to questions.

Dive Insight:

The report of slower salary increases preceded the release Thursday of Commerce Department data showing that the economy expanded 1.6% last quarter, far less than forecast, as personal spending rose a less-than-expected 2.5%. Gross domestic product during the final quarter of last year increased 3.4%.

“Economic growth will remain below trend this year,” inhibited by limited fiscal support, constraints on low-income consumers, higher energy prices and conflict in Ukraine and the Middle East, Scott Hoyt, senior director at Moody’s Analytics, said in a report to clients.

“The recent pace of growth was unsustainable as high interest rates take an increasing toll, inventory accumulation remains modest and the saving rate stops dropping,” he said. “While growth should stop declining, it will remain modest.”

Low GDP growth for the first quarter surprised the markets, undercutting stocks and pushing up the yield on the benchmark 10-year Treasury note above 4.7% compared with 4.1% on March 11.

Inflation data also exceeded expectations. The preferred inflation measure for the Federal Reserve — the core personal consumption expenditures price index excluding food and energy — increased 3.7% last quarter on an annualized basis, far beyond the central bank’s 2% target, the Commerce Department said.

“While inflation remains a concern, drivers appear to be in place to push inflation lower despite its uptick at the start of the year,” Hoyt said. “Until that happens, however, risks remain.

“Fed officials have made it clear they will not cut interest rates until inflation is definitively headed back to their target,” he said.

Amid persistent inflation this year, investors and economists since December have reduced forecasts for the number of quarter-point cuts to the Fed’s main interest rate this year from as many as six to just one or two.

Traders in interest rate futures on Thursday saw 68% odds that the Fed after a policy meeting in July will hold the benchmark interest rate at the current range of 5.25% to 5.5%, compared with 44% odds on April 12, according to the CME FedWatch Tool.

CFOs have trimmed their plans for boosting pay even amid robust demand for labor this year. Payrolls increased 303,000 in March, far more than forecast, and unemployment dipped to 3.8% from 3.9% in February.

Some data shows signs of a softening labor market.

The quits rate, or the number of workers who left their jobs as a percent of total employment, fell to 2.2% in February from 3% in April 2022, according to the Labor Department.

Pay gains across the economy have exceeded inflation during the past year, suggesting that workers have less incentive to switch jobs to gain higher pay and buffer against inflation. Average hourly earnings rose 0.3% in March and 4.1% over the prior 12 months.

Some employers may need to step up the pace of pay raises in coming years, Citron said.

“While budgeted increases are decelerating from recent peak levels, there are some recent trends — including pay transparency legislation and minimum wage increases — that may still put pressure on wages in the coming years,” he said.

“Some states require companies to share employee pay ranges upon request or to display hiring ranges in job postings, and we find that with more transparency, employees feel more open to speak about compensation with one another than they had been historically,” Citron said.

Consequently, many companies seek to align their compensation with the market and ensure they can justify pay levels, according to Citron. Some companies are budgeting for larger “market-alignment” pay increases.

Budgeted merit increases this year differ by industry, with transport and equipment companies planning 3.9% average gains and the healthcare service and retail and wholesale sectors budgeting an average 2.9% increase, Mercer said.