Lower Labor Costs Have A Price

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by: Carlos X. Alexandre

After we learned through GDP that incomes and savings are declining, along comes the Employment Cost index, which provides a summary for the quarter, and the 0.3% increase was the smallest since the first quarter of 2009. This index tracks the change in the price businesses and the government pay for civilian labor, and the flip side of the data is that they indicate the continued deflationary forces that are in play. The release, which comes from the Bureau of Labor Statistics, delivered the following summary.

Compensation costs for civilian workers increased 0.3 percent, seasonally adjusted, for the 3-month period ending September 2011, the U.S. Bureau of Labor Statistics reported today. Wages and salaries (which make up about 70 percent of compensation costs) increased 0.3 percent, and benefits (which make up the remaining 30 percent of compensation) were virtually unchanged at 0.1 percent.

At the same time the Bureau of Economic Analysis released the Personal Income and Outlays report, with spending up 0.6% and income up 0.1%. Obviously there is a shortfall, and the difference is either made by dipping into savings, saving less, or charging up whatever credit cards are still laying around, and the income weakness is more accentuated in the manufacturing sector.

Private wage and salary disbursements increased $17.9 billion in September, in contrast to a decrease of $9.8 billion in August. Goods-producing industries' payrolls increased $1.6 billion, in contrast to a decrease of $3.5 billion; manufacturing payrolls decreased $1.1 billion, compared with a decrease of $4.3 billion. Services-producing industries' payrolls increased $16.3 billion, in contrast to a decrease of $6.3 billion. Government wage and salary disbursements decreased $0.7 billion, in contrast to an increase of $1.3 billion.

Even though the University of Michigan’s consumer sentiment was revised up – from 57.5 to 60.9 -- it still stands at one the lowest levels since the end of 2008, and if incomes continue to weaken, it’s only obvious that spending will start to contract, because simple mathematics cannot be defeated.

Furthermore, and as I’ve pointed out many times before, current times will continue to deliver extreme economic challenges, and the income portion of the economic data will feed a vicious cycle of lower spending yet to come. Corporations will reach a level of diminishing returns provided by increased labor savings, and, without a doubt, will have to start dipping into their own savings. It’s only common sense that, for example, if a Wal-Mart (WMT) employee earns less, he or she will buy fewer Wal-Mmart products. Thus, the forecasts for a recovery that are delivered in a vacuum purely based on the face value of any daily economic number, fall short of reality.

And one may not have to wonder why corporate cash is being hoarded, for it is not hoarding, but rather savings for a rainy day. I am not certain how to restart the engines unless there’s something done about the debt in a large, Greek style scale. In addition, what is viewed as a haircut is truly called "debt destruction” and someone has to pay the price, and getting people to “volunteer” is always the hard part.

But I still read headlines about how surprised some people are regarding the weak recovery compared with anything in recent memory. That’s because there’s no point of reference, and this is not the typical recessionary walk in the park. If I had to deliver a super macro view of what happened, it would go as follows: Humanity built a house of cards, and without pointing fingers, I can say that there were crooks, dumb and dumber, and a bunch that got caught in between. There’s no advantage or resolution in attributing blame, and now everyone has to chip in because the damage is done.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.