Pizza parlors aren’t the only businesses hiring—jobs growth is humming! But what about wages? Photo by Elliot Fine/Moment Mobile ED.
“Job growth is rocking, but wage growth stinks.” So went most coverage of December’s jobs report, which saw nonfarm payrolls rise by 252,000 and the unemployment rate drop to 5.6%—yay!—but average hourly wages fall -0.2% m/m (the y/y number slowed to 1.7%). Blarg. That dim number resurrected long-simmering slow-wage-growth fears, with many claiming America’s labor markets and economy can’t be healthy if incomes are stuck in neutral. However, a broader look at income data paints a different picture. Stocks don’t need rip-roaring income growth for this bull market to continue, but the apparent disconnect between slow-income-growth perceptions and fine-income-growth reality suggests sentiment remains a tad too dour—a bullish disconnect.
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Now, we aren’t arguing incomes are booming. But they also aren’t as sad as Friday’s news suggests. There are many income growth gauges. The BLS’s measure—average hourly earnings—is one. The BEA has others, like disposable income and wage and salary growth by industry. All paint slightly different pictures.
First, the sad-looking hourly earnings. Year-over-year growth is the slowest of any expansion since 1965. It is likely cold comfort to most workers that non-supervisory and production employees—frontline workers—saw faster wage growth than their bosses. (Exhibit 1)
Exhibit 1: Average Hourly Earnings
Source: Federal Reserve Bank of St. Louis, as of 1/9/2015. Average Hourly Earnings for All Employees and Production & Nonsupervisory Employees, y/y change, January 1965 – December 2014.
But is that the full story? After all, real disposable incomes are largely in line with past expansions, aside from a bizarre blip surrounding the payroll tax holiday’s December 2012 expiration.[i] (Exhibit 2)
Exhibit 2: Real Disposable Personal Income
Source: Federal Reserve Bank of St. Louis, as of 1/9/2015. Real Disposable Personal Income, January 1959 – November 2014.
Per-capita disposable income looks similar—population growth doesn’t explain the rise in America’s total disposable income. Actual incomes actually grew. (Exhibit 3)
Exhibit 3: Real Disposable Personal Income Per Capita
Source: Federal Reserve Bank of St. Louis, as of 1/9/2015. Real Disposable Personal Income Per Capita, January 1959 – November 2014.
But this doesn’t shed much light on how workers are doing—too big picture. It shows how much the entire country is making, but not who’s making it. Slice it, and things get interesting. Exhibit 4 shows year-over-year growth in total, government and private sector real wages and salaries. Total and private-sector wage growth during this expansion doesn’t much differ from the prior expansion or much of the 1990s. Government wages have struggled, but public-sector cutbacks are well-known—“austerity” isn’t evidence of inherent economic weakness.
Exhibit 4: Real Wage and Salary Growth
Source: Bureau of Economic Analysis and Federal Reserve Bank of St. Louis, as of 1/9/2015. Y/y percent change in total, government and private-sector wages and salaries, minus y/y percent change in the Personal Consumption Expenditure price index, January 1960 – November 2014.
And lest anyone claim growth went to CEOs, not normal folks, consider Exhibit 5. The history here isn’t as long, since the BEA changed its categorizations in 2001 and didn’t apply them retroactively, but it shows enough. Production wages grew fastest, and services grew neck and neck with manufacturing. Seems broad-based to us.
Exhibit 5: Real Wage and Salary Growth by Industry
Source: Bureau of Economic Analysis and Federal Reserve Bank of St. Louis, as of 1/9/2015. Y/y percent change in total, government and private-sector wages and salaries, minus y/y percent change in the Personal Consumption Expenditure price index, January 2002 – November 2014.
Note, no one series here is more “right” than another. But no one metric tells the whole story. Gauging how well American workers are doing requires looking at all broad statistical information. Not one data series only. Not anecdotal evidence. To us, most income data suggest workers today are doing better than dour headlines indicate.
That’s what ultimately matters for stocks. In a vacuum, stocks don’t really care who’s making how much money—markets are callous. But markets do care whether sentiment matches reality. Too-dour perceptions suggest sentiment is lagging and stocks haven’t finished climbing the wall of worry. The clear disconnect between sentiment and reality regarding income growth suggests plenty of wall remains—good for markets.
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[i] When it became clear annual payroll taxes would rise 2 percentage points beginning January 1, 2013, employers pulled planned bonus payments into 2012 to give their employees as big a boost as possible. That artificially boosted incomes in December—and subtracted from January 2013’s. It also skewed the year-over-year comparisons 12 months later, when rejiggering for tax purposes was largely kept to a minimum.