Drop the Inflation Concerns

As I've outlined before, wages tend to be the one of the better predictors of inflation (or deflation) out there as wages tend to be very sticky and stable (so when they move, it tends to mean there is a new underlying trend).

So how are wages currently holding up?

Well, earlier this week, the BLS released compensation figures for Q1 and even with negative real interest rates and multiple quantitative easings, there is absolutely no wage inflation in the pipeline. In fact, the year-over-year change in nominal wages came in at just 1.3% at the end of March and 0% over the last six months, the lowest since the crisis and below the rate of inflation.

Even more concerning (to me) is that these figures are as of March, before business sentiment took a turn for the worse on renewed European concerns.

With no inflationary pressure and limited growth potential, a low yielding Treasury bond almost appears justified.

Source: BLS, BEA, Fed

Good to Be Government

The obvious argument for the trend shown below is that government workers provide needed services to the public, thus were able to keep their jobs during the downturn.

Good to be government none-the-less.

Source: BEA

Not Sustainable

The WSJ details:

U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable.

Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday.

Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth.

With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.

Below is a chart of the cumulative change in the largest sub-component of personal income, compensation, in real terms over the past three years.



And a chart of the same data, but in year over year terms since 1990.

The above disconnect occurred for a number of reasons (less savings, transfer payments [i.e. unemployment], return on financial assets, borrowing [commercial bank credit is down due to defaults, but net borrowing is actually up], and missed mortgage payments [some evidence that people are spending what "should be" their mortgage]).

None of which are sustainable.

As a result, look for consumption to slow unless wages and actual income levels begin to rise.

Source: BEA

The Rich Get Richer: Weekly Wage Edition

Wages rose across the board! Good news right? Not necessarily. Per the WSJ:

There were about 8.2 million fewer full-time wage and salary workers in the third quarter than two years ago; the data doesn't include part-time or self-employed workers. Low-wage workers are hit disproportionally during recessions, and their absence from the tally could cause median wages to rise even if the typical worker isn't getting a raise.

Even with the benefit of the "drop out effect" of low-wage workers dropping out of the data, the lower income workers saw their weekly wages rise to a much less extent than higher income workers (i.e. the rich got richer). Here's the change in weekly earnings for quartiles and the top / bottom deciles since the recession began in December 2007.



BUT, part-time workers saw a large jump in pay too you say? Unfortunately, that is mainly due to:

• A large number of these part time workers "should" be / were full-time workers, thus this "jump" in pay were actually pay cuts as they got downsized to part-time
  
• Young workers were the only age group to see their wages decline over the past two years as there was limited demand for their services (the unemployment rate among young people is an outlier even in this ugly economy), thus a greater percent of the part-time workers were non-young people, who typically earn less
  

Historical figures...



Top decile earners now make more than 5 times the amount that bottom decile earners make, up from 4.4 in March 2000 (as far as this data goes back).

Source: BLS

The Wage Freefall

Tom Lindmark commented (in response to my post on private and government wages):

I thought the chart on total compensation was even more interesting.

I agree. This is not only more interesting, but unfortunately also more frightening.

Source: BEA

Update:

Reader Dan Buckstaff makes the keen observations that:

This appears to be some kind of nominal number, rather than real wages. There's no way that real wages gained that much per year in the 1970s. And the annual gain since 1980 reflects decreasing inflation.

Nonetheless, the recent plummet is alarming, especially relative to an indebted consumer.

And he is absolutely correct (and I should have made that more clear). We have seen real declines of similar magnitude during the 1970's, but never in nominal terms. Below is a chart real wages over that same time frame.



The good news is that in real per capita terms, it doesn't look as bad. The bad news is that in a nation as indebted as the U.S., nominal is important. Not in terms of earnings power for new purchases, but to service existing debt loads.

It's Good to Work for the Government

Cato at Liberty with the details:

In 2000, the average compensation (wages and benefits) of federal workers was 66 percent higher than the average compensation in the U.S. private sector. The new data show that average federal compensation is now more than double the average in the private sector.

In 2008, the average wage for 1.9 million federal civilian workers was $79,197, which compared to an average $49,935 for the nation’s 108 million private sector workers (measured in full-time equivalents). The figure shows that the federal pay advantage (the gap between the lines) is steadily increasing.

And with much less volatility (which should make the case that government workers should be paid less).

As the chart above indicates, the gap between the two should explode when 2009 figures are released.

Source: BEA

"Average" Real Income of the Population

Yesterday's post about the number of hours worked by the "average" person in the population (full details here) had some great feedback and an additional request. Before moving on to that, here is an additional chart showing the relationship (strong) between the number of hours worked by the average member of the population and growth in the economy.

And now the request (bold mine) by an anonymous reader:

Now to get the real "eye popper".... multiply the last graph (the red hours worked in the above chart) by the trend in wages. That will reflect the "earning power" (hence spending power) of the population.

Taking the previous chart and multiplying the data by the average hourly wage (I used private wages found here, but open to suggestions if there is better data) going back to 1964 and adjusting to 2009 $$ (via the CPI index), we get the following:

Interesting. Despite the spike in real hourly wages to levels last seen 30 years ago (due to a steady level of pay and deflation in recent months), average weekly wages are down to levels seen in the late 1990's (due to the decline in hours worked).

My guess is that the number of hours worked may be bottoming, but the real hourly wage increase we've seen has a large correction coming sooner than later. Thus, expect the weekly figure to continue its steep descent.

That said, anyone care to help with an explanation the movement in the 1960's and 1970's?