Aggregate Income Growth Falls Sharply

Aggregate Income Growth Falls

Just because the February labor report could be a blip doesn’t mean we shouldn’t review it. To be fair, the January labor report was also a blip since it’s highly unlikely job creation averages above 250,000 in 2019 let alone the 311,000 jobs created in January. 

The February report doesn’t signal a recession is coming soon if you look at the 1 year change in private payrolls. Year over year growth fell from 2.2% to 1.9%. Growth fell to 1.6% in September 2017 when there was a blip lower in job creation. Yearly growth for the cycle peaked at 2.56% in February 2015. That yearly growth peak wasn’t a signal economic growth was about to accelerate. There was a slowdown from late 2015 to early 2016.

If you multiply average weekly hours worked by real average hourly earnings which is multiplied by the number of employed people, you get a proxy for aggregate income. Effectively, that’s weekly wages multiplied by the number of employed people. 

Since weekly wage growth fell from 3.4% to 3.1% and payroll growth fell from 2.2% to 1.9%, it’s no surprise the aggregate income proxy’s yearly growth rate fell from 4.32% to 3.24%. The cycle peak was 5.04% in February 2015. Currently, it’s still towards the high end of this cycle’s range as you can see from the chart below.  

Aggregate Income Growth - Service Jobs Versus Manufacturing

One indicator which has shown some efficacy is service job creation minus manufacturing job creation. This difference correlates with the cycle because the service sector creates most of the jobs. 

As you can see, this difference fell last year partially because manufacturing was strong. It’s now set to increase because manufacturing has been weakening. The difference between the service and manufacturing ISM PMIs was relatively high. You need to realize the catalyst for the weakness before drawing conclusions. 

Personally, I’d rather see manufacturing strength pushing it lower than service sector weakness pushing it lower. Also, I’m not 100% clear if the service economy is strengthening. My analysis doesn’t solely rely on the Markit and ISM PMI reports. Many analysts like me need to review hard data such as retail sales.

Aggregate Income Growth - More People Looking For A Job

The chart below is another example of contextualizing the data. That’s because usually when more people are looking for a job, it means the economy is weakening. The last recession is a great example. 

We knew the labor market was weakening because the percentage of people who got a job fell. Recently, the percentage of people who started looking for a job has risen, but the percentage of people who got a job didn’t fall. This signals the labor market isn’t weakening. Instead, more people are looking for a job because they are coming off the sidelines. 

Besides this data, I look at the JOLTS report which shows the percentage of quits. That’s delayed by a month.

Aggregate Income Growth - Not Many Workers Available For Work

Civilian labor force fell 45,000 in February which was the second straight month of declines. That’s important because we need to see people coming off the sidelines to increase the slack in the labor market. People who have given up looking for work aren’t included in the labor force. Hence, it increases when people come off the sidelines.

A falling labor force isn’t a great signal for slack in the labor market because it means fewer people are coming off the sidelines. The 2 month decline in the labor force isn’t a huge deal historically as there are many periods in the past 5 years where it has fallen more. 

However, the chart below shows the pool of available labor has been stable for a few quarters. The pool stabilized at a lower amount in the late 1990s and near where it’s at now in the 2000s. There might not be that much slack in the labor market despite what the prime age labor participation rate implies.

The unemployment rate increased in January despite the 311,000 jobs created because the population fell. That’s the same reason why the labor force participation rate increased then. Unemployment rate was helped lower in February by the increase in the population. 

Unemployment rate hasn’t bottomed in the sense that 3.7% is the lowest point it will reach this cycle. However, it is in a bottoming process where it won’t fall much further. On a 6 month and 12 month average basis, the unemployment rate has stabilized at monthly job growth between 145,000 and 155,000.

Aggregate Income Growth - Wage Growth Doesn’t Mean Inflation

This expansion has lasted so long because wage growth hasn’t pushed up inflation. That means the Fed hasn’t needed to raise rates to the point where they would cause a recession. Rate hikes would be necessary if inflation was higher. 

One more rate hike would probably cause a recession because the yield curve is flat; some parts of the curve are even inverted. Since the economy is slowing, rate hikes like the one in December are a mistake.

As you can see from the chart below, average hourly earnings growth is accelerating while core inflation is in the same range it has been in for most of this cycle. 

To be clear, I like to look at weekly earnings growth instead of hourly earnings growth because total pay is affected by hours worked. However, that difference mainly affects month to month changes. In the long term, hourly and weekly earnings growth are similar. 

The length of the work week falls during recessions and rises right after them. There isn’t much of a trend during expansions because if the length fell, it would approach zero and if it rose, it would be limited by the amount of time in a day.  

Aggregate Income Growth - Conclusion

Aggregate earnings growth fell, but not by enough to cause grave concern. Service sector employment should grow much faster than manufacturing because service PMIs are much stronger than their manufacturing counterparts. 

People are looking for work, but the pool of workers has been stable. There aren’t many workers left in the pool. Wage growth hasn’t catalyzed an acceleration in core CPI or core PCE.

Spread the love