First, before I get into wage growth, I would like to correct an error I made in a previous article where I said the 8 day losing streak in the S&P 500 was tied for the longest ever. Today’s down day is the 9th straight which is the longest streak since 1980. The longest losing streak ever is 12 days. I still stand by my opinion on this decline which is that it isn’t itself reason to be bearish, but it could signal the beginning of a bear market because of other factors I look at such as valuations and the credit market.
One of the main narratives being reported by the mainstream press is that the wage growth was better than expected as it came in at 0.4% instead of 0.3%. This led to an annual increase of 2.8%. There are two groups of people who are claiming the report was great because of this wage growth. The first group are those who are interested in scoring political points in order to help defeat Trump. They would say the report was great no matter what the numbers were. There is also Trump’s side which puts its own spin on the report, but that doesn’t get reported on nearly as much because most people in finance and economics support Hillary.
The second group is the usual group of economists/financiers who want to support the narrative that the economy is strong and can withstand rate hikes. They’ve been wrong for about 7 years, but they don’t stop believing in the possibility of a rate hike. As I said previously, because the Fed says it is data dependent but doesn’t say which data it is dependent on, it can spin this report however it wants. It can raise rates based on the beat in wage growth or it can cut rates based on the miss in the headline jobs number.
The wage growth beat wasn’t as great as it’s being reported because the biggest increases went to supervisors. I’m not necessarily saying supervisors’ wages don’t matter, but the wages of the biggest group of people (82%), which is the workers, is much more important. As you can see in the chart below, the average weekly earnings figure has been volatile, so each report doesn’t necessarily mean there’s a trend shift. The growth in this cycle has been about 2.5% while it has been 4.5% in previous cycles.
Besides the workers being a larger portion of the labor force, these is another reason to focus on this group. The narrative being purported by those who want rates to rise because the economy is strong believe these wage increases signal there isn’t much slack in the labor market. When slack decreases, workers get a raise because of the laws of supply and demand. The reality is the slack in the labor force is still high because of the lack of full-time jobs. How could there be tightening slack in the labor market if 103,000 full-time jobs were lost in October?
The 18% of workers in managerial positions saw a 4.7% rise in wages in October. As you can see in the chart below, the wage increases have been lumpy like the entire recovery has been. The wage growth in this segment doesn’t line up with how the economy has performed. There was a mid-cycle slowdown in 2012 which can be seen in the non-supervisor wage growth. In 2012 supervisors’ wage growth was strengthening to its fastest rate this cycle. This makes it a less reliable indicator. It’s also worth keeping in mind that the current rate is matching that peak. After it peaked it fell to flat in 2014.
The final chart I have is the average weekly hours of all employees. It has decelerated the most since the financial crisis. It is currently at the level of December 2007 which was when the economy was already in a recession. The bullish economists conveniently leave this metric out when referring to this report as a positive one.
Conclusion
The wage growth being reported by the media isn’t as positive as it is led on to be. Most of the wage growth is in managerial positions which hasn’t correlated with economic growth. Other statistics show the labor market is weak such as the headline number and the weekly hours number. It’s easy for me to poke holes in their arguments because they have an inherent bullish bias. They do not want to admit that this rally in stocks and junk bonds needs to be reversed.
The stock market has fallen 9 days in a row because Trump’s chances of being president have increased. This political risk pales in comparison to the economic risks we face as corporations are the most levered they’ve ever been and valuations are stretched. I see the initial reaction to a Trump win as a Brexit type event. However, Trump will have a larger effect than the Brexit. The Brexit still hasn’t even been completed after a few months. Trump will have a more immediate effect. I’m not saying it will be a bad effect, but it doesn’t matter what I think. If investors believe it will be bad, stocks will be crushed.
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