Written by Steven Hansen
A small economic growth spurt is forecast according to the Federal Reserve and a slew of economists for 2018.
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Definitely construction and transport sector’s growth rates have picked up – and pre-Great Recession history tells us this is a bellwether of better times. But on the other hand, too many economic elements are soft.
Take wages and salaries – historically the growth rate correlates with economic expansion. According the BEA income data, wages and salaries are currently growing at a rate about average for times of economic expansion (blue line in below graph). Unfortunately, BEA wages and salaries are heavily influenced by the upper quartile whose salaries rise significantly faster than the lower quartiles.
The BLS’ Average Hourly Earnings of Production and Nonsupervisory Employees data set (red line on graph below) is currently at the highest year-over-year rate of growth since the end of the Great Recession. This upward trend began in October 2012. One might think this data set is primarily for manufacturing but it includes the service sector also. From FRED:
Nonsupervisory employees include those individuals in private, service-providing industries who are not above the working-supervisor level. This group includes individuals such as office and clerical workers, repairers, salespersons, operators, drivers, physicians, lawyers, accountants, nurses, social workers, research aides, teachers, drafters, photographers, beauticians, musicians, restaurant workers, custodial workers, attendants, line installers and repairers, laborers, janitors, guards, and other employees at similar occupational levels whose services are closely associated with those of the employees listed.
This BLS Average Hourly Earnings of Production and Nonsupervisory Employees data set should provide a good picture of what the lower and middle quartiles are seeing in terms of wage and salary growth.
But the data discussed so far ignores inflation which is currently at a six year high – but it still is about the average seen since 1990. Inflation eats wage growth. The yellow line on the above graph shows real earnings growth – and one can notice that the year-over-year growth rate is currently far from excellent. How can the lower quartiles of the economy expand spending when their paycheck is not keeping up with inflation.
When one believes economic growth is improving, it is not a stretch to believe it is a positive dynamic for the markets. But with median wage growth and inflation growing about the same rate – it is highly improbable that a consumer driven economy can accelerate.
Other Economic News this Week:
The Econintersect Economic Index for June 2018 improvement cycle continues and remains well into territory associated with normal expansions. There are continuing warning signs of consumer over-consumption, as well as a degrading relationship between retail sales and employment.
