Wage Growth, Productivity And The Dance Of Consumer Spending

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Douglas Adams
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Summary

  • Disposable income was up sharply through the end of the first quarter while wage growth remains stubbornly subdued by historic measures.
  • Corporate investment in efficiency of scale and equipment remains anemic in the face of weak demand for goods and services in the greater economy.
  • Involuntary part-time employment as a percent of the labor force remains high by historic measures.
  • Consumer spending has pulled back in the past several quarters, remains at the center of US total output.

Disposable personal income was up sharply through the end of the first quarter, posting a 4.4% increase on the quarter - almost in defiance of the tepid 0.8% gain in the May report on total US output. The surge in disposable income during the quarter is broadly linked to the continuing robust hiring of workers in both the private and public sectors that has averaged 192,000 new jobs through the four months of 2016, adding in theory both new and enhanced purchasing power to the overall economy. The national unemployment rate at 4.7% through the end of May hovers ever so close to the natural rate of full employment, that inflection point beyond which again in theory price inflation in the greater economy takes hold.

In practice, wage growth remains stubbornly subdued by historical measures, which plays to a host of causal features: low levels of productivity, low levels of corporate investment in efficiency of scale and equipment, low levels of outward demand for goods and services - exacerbated by a sharp and prolonged decline in energy costs that applied relentless downward pressure on pricing structures throughout the greater economy.

The size of the Great Recession of 2007 added a new dimension to the overall equation: Many companies appeared loathe to the idea of furloughing skilled, often high-end workers as decision-makers wrestled with a financial onslaught whose overall dimensions few in government or the corporate world readily understood. In the late months of the Great Recession of 2007 and the beginning months of the official recovery period that started in June of 2009, productivity measures soared to an average annualized rate of 3.51% from April 2009 through October 2010 as companies ran skeletal productive processes that attempted to meet both market demand and the ever-changing dictates of market survival. The range of productivity gains was striking: The high for the period was 5.45% in October 2009 and the low was 1.84% exactly a year later. At the same time, job loss during the April 2009 through the end of the year averaged 306,000 jobs per month, with an equally striking range of 686,000 job losses in April to 7,000 job losses in November of that year. By January 2010, the monthly job loss carnage flipped positive with the average gains per month hitting roughly 86,000 through October.

The 12-month change in total compensation across the economy came to 1.70%. Only the second (1.40%) and third (1.50%) quarters of 2009 posted lower year-over-year cost structures from 2001 through the end of 2015. The average wage for all nonfarm employees in 2009 came to $22.17/hour. By the end of the following year, that hourly wage had climbed to $22.58/hour for an implied wage growth of 1.86% year over year. This was the lowest annualized wage growth post in the data series that spanned 2006 through 2015. Subsequent annualized wage growth largely flatlined thereafter as aggregate wages were artificially propped up by the preponderance of furloughed lower wage level and less skilled workers that flooded the ranks of the unemployed. Productivity fell to an average annualized rate of 0.51% from January 2011 through October of 2015.

Firms remained extremely cautious during both the recession and recovery period in regard to hiring - especially in the hiring of full-time staff. And with good reason: Full-time positions with benefits are both expensive and more difficult to unwind in highly uncertain economic times. Prior to the official start of the Great Recession of 2007 in December of that year, part-time workers averaged 8.9% of all workers on data back to January 1994. By October and November of 2009, that number had almost doubled to 17.1% of the workforce. Through last month's job report, the number of part-time workers has fallen to 9.7%, still above pre-crisis levels.

Economic growth through much of the recovery period appears to have been driven much more by an expanding labor force during the recovery period rather than by gains in productivity. If the surmise is correct, job creation in the latter part of the official recovery period has acted as more of a subtraction than an addition to aggregate wage growth while offering an explanation as to why job growth has been so strong while at the same time GDP growth has been so weak.

Wage growth was largely unchanged in May, up 2.482%, down slightly from April's 2.488% on a year-over-year basis and a full 0.25 percentage points above the average of the past two years. The main drivers of the increase were information workers who collectively logged the biggest year-over-year wage increase at 4.96, followed by mining and logging workers at 4.10%. Both categories are at the top end of the wage scale for the month and employ a scant 2.43% of the entire nonfarm payroll for the month (see Figure 1 below). The mining sector includes exploration and production (E&P) and oil service companies, which continue to lose workers with the downward spiral of oil prices since June of 2014. Mining lost another 11,000 workers in May and has lost an estimated 207,000 positions as a result of crude's price slide to date. Employment in information services posted a 34,000 job loss for the month.

At the other end of the pay spectrum, retail and leisure/hospitality workers both logged respectable hourly wage increases of 2.47% and an above-trend 3.50%, respectively. Retail added 11,400 jobs while the leisure/hospitality sector added 11,000 during the month.

Figure 1: Wage Growth May 2015-May 2016 in Hourly Private Nonfarm Payrolls, Seasonally Adjusted

Industrial Sector

Number of Employees

YOY Percent Growth

May Hourly Wage

± Total Private

Mining/Logging

695 thousand

4.10%

$32.27

1.68

Construction

6.645 million

2.56%

$28.04

0.078

Manufacturing

12.285 million

3.29%

$25.99

0.808

Wholesale Trade

5.911 million

2.65%

$29.48

0.168

Retail Trade

15.928 million

2.47%

$17.84

-0.012

Transport/Warehouse

4.883 million

2.11%

$23.03

-0.372

Utilities

562 Thousand

2.90%

$38.01

0.418

Information

2.751 million

4.96%

$36.59

2.478

Financial Services

8.255 million

2.09%

$32.18

-0.392

Professional/Business

20.11 million

2.33%

$30.72

-0.152

Education/Health

22.640 million

1.94%

$25.71

-0.542

Leisure/Hospitality

15.453 million

3.50%

$14.81

1.018

Other Services

5.685 million

1.83%

$22.84

-0.652

Total Private

143.849 million

2.482%

$25.59

-

Wage growth at 2.48% remains well below the long-term trend of 4.25% on data back to 1965 or the 3.16% pace set from 1992 to 2000. May's wage growth numbers, however, appear more evenly distributed with 54% of wage earners falling short of the month's pace while 46% exceeded that pace.

Still, betting against the US consumer much like similar bets against the Federal Reserve or City Hall is often wrought with folly. While vehicle sales were down through much of the period from November to February, by March sales jumped 3.2% and again by 3.1% in April despite an uptick in sub-prime auto loan delinquencies. Auto part retailers appear to have a negative correlation with the economy as a whole. O'Reilly Automotive (ORLY) has almost doubled since January of 2014 and is up 13% from its nadir this year on the 15th of January. More importantly, auto parts are not yet a venue found on large Internet retail platforms, insulating regional parts dealers from such completion.

On some levels, consumer spending indeed appears cautionary: Inquiries to credit reporting firms, a lagging indicator of credit demand, fell by 8 million during the past six months. Yet, a day after a litany of major department stores reported a sharp decline in quarterly earnings, April online retail sales increased 2.1% for the month. Amazon (AMZN) is likely one of the best proxies for consumer discretionary spending given the breadth of products and services sold on its platform. The issue is singular in defining the shift from bricks and mortar to online retailing.

A broader exposure to consumer spending play is the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY). XLY is a passive, low-cost attempt to capture a wide swath of consumer spending: retail, home improvement, media, travel, fast food and coffee houses. The ETF has outperformed the S&P 500 benchmark at the one-year, three-year, five-year, and 10-year intervals.

Restaurants and drinking places soared 5.2% for the month after managing a 1.5% advance for the entire period from November 2015 through January. Ruth's Hospitality Group (RUTH), owner of the eponymous Ruth's Chris Steakhouse, and Darden Restaurants (DRI), owners of Olive Garden and the Red Lobster family dining chains, have both outperformed the S&P 500 benchmark year-to-date under difficult market conditions.

Consumer spending is driven by a variety of variables, some easily quantifiable such as steady increases in discretionary income, job creation and wage growth. More nuanced drivers include measures of consumer sentiment and confidence, expectations of future economic growth and the so-called "wealth effect." Discretionary income powers the equation - without a steady rise in discretionary income, consumer spending rarely extends much beyond the daily requirements of life - food, clothing and shelter. On the quantitative side, discretionary income is up just over 14% from 2011 through the end of 2015. On the nuanced side, overall net worth is up just over 37% over the same period. Consumer sentiment and confidence measures remain strong and above long-term averages. All of these drivers combine to create the environment for household spending that extends beyond essentials: The purchase of a home, a second home, renovations of existing home, vacations, the purchase of a car or recreational vehicle - are all discretionary decisions made in favorable economic environments.

And the latest measure on consumer spending through the end of April was up 1% for the biggest monthly increase since August 2009, a good sign for an economy that derives 70%+ of its total output from just such spending.

This article was written by

Douglas Adams profile picture
1.58K Followers
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.
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Disclosure: I am/we are long AMZN, ORLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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