Bank of America Has Some Words For David Rosenberg: "Don't Hold Your Breath" On Rising Wages

Tyler Durden's picture

Back in mid-2013 David Rosenberg infamously flip-flopped from deflationary bear to inflationary bull. That's ok - everyone has a right to change their mind (for whatever reason, even if said reason involves a direct interest in selling more newsletter subscriptions).

However, the catalyst that Rosenberg saw as the progenitor to a broad inflationary wave in the US economy was a surprisingly weak one: wage inflation and rising labor costs.

"Weak" because as can be seen quite clearly in the labor market one year later, there has been virtually no wage inflation and as we showed last month in "No Raise For You: Earnings Growth Drops To New Post-Lehman Lows", if anything the fear among the bulk of the population is that wages will remain at best flat if not continue to stagnate in both nominal and certainly real terms. This month's below expectation print in average hourly wages, which was unchanged from March, merely confirmed this.

But while we have explained time and again why the possibility (and probability) for rising wages in the US (and certainly in poor Japan which despite massive QE just reported 22 consecutive months of declining base wages) is slim to none, others - certainly those who also have a vested monetary interest in pitching the bullish, inflationary case - were largely on the sidelines of this argument, if not also notable bulls that a pick up in wages is just around the corner.

However, one Wall Street strategist who appears to have thrown in the towel on the entire rising wages debate is none other than BofA's chief economist, Ethan Harris, who in a note released on Friday fires the proverbial shot across the David Rosenberg bow regarding rising wage pressures: "Don't hold your breath."

From Bank of America:

Inflation: sour cherry


By some accounts inflation is always just around the corner. Rising gold prices, surging bank reserves and a weak dollar have each taken their turn “predicting” imminent inflation. The latest concern is that tight labor markets will trigger a surge in wages. Indeed, the hottest inflation chart these days shows average hourly earnings for production and non-supervisory workers, troughing at 1.3% in October 2012 and accelerating to 2.3% for the latest reading. As one of our competitors argues: “it should be obvious to everyone by now that there is wage inflation in the pipeline.


How worried are we? In our view, the wage measure that Inflationistas like to point to is the least reliable of four major measures of compensation growth. Plotting this series alone is a blatant example of “cherry picking” to tell a story. A number of years ago the Labor Department replaced the old average hourly earnings series with a better, broader measure. The older series only exists because it has a long history. The three most important measures of labor  compensation—including the new and improved average hourly earnings series—remain glued to 2% (Chart 1).



So far, so good, but doesn’t the drop in the unemployment rate signal rising wages? In particular, since the long-term unemployed have a very hard time finding a job, shouldn’t we focus on the short-term unemployment rate, which at 4.1% is already 0.6pp below its historic average (Chart 2)?


Don’t hold your breath: serious wage pressure is a long way off for four reasons.


  1. First, it is not at all clear that we should ignore the long-term unemployed. As Fed economist Michael Kiley points out, short-term and long term unemployment are normally highly correlated, so studies that try to distinguish their impact on inflation must rely on just a few years of data. Small sample and “multicollinearity” problems make these estimates very unreliable. Kiley gets around these problems by using regional data. Using data for 20 metro areas over a 20-year period, he finds that both short- and long-term unemployment matter, with similar coefficients. We prefer to split the difference between Kiley’s results and others that focus only on the short-term rate: while more weight should be given to the short-term unemployed, the weight on the long-term jobless for wage determination should not be zero.
  2. Second, if we are going to throw out the long-term unemployed in our measure of slack, surely we should also take into account hidden unemployed such as discouraged workers, those opting for additional schooling, and involuntary part-timers. We could easily boost the unemployment rate by a percentage point if we try to capture hidden unemployment.
  3. Third, even if we are at full employment, it does not mean surging wages. Most of the recent research on wage and price inflation finds a very slow, lagged response to labor market tightness. The Phillips Curve appears very flat. For example, in Kiley’s estimates, a one percentage point drop in the unemployment rate adds 0.1 to 0.2pp to inflation in the first year and 0.2 to 0.3pp in the second year. Most of the discussion of inflation risks ignores this important empirical result and makes it sound like inflation is an explosive process. Both history and models show that it takes a long time to get going (but can also be hard to reverse if it gets too high).
  4. This brings us to our final point: rising wages are a good sign for the economy, not something the Fed would want to prevent. As Fed Chair Janet Yellen has suggested, in a normal labor market we would expect wages to grow at about a 3.5% rate: 2% to cover the rising cost of living and 1.5% to cover productivity gains. Currently, downward pressure from high unemployment is holding wage growth to just 2%.

The upshot is that investors should not be on the edge of their seats waiting for the first hint of wage acceleration. As labor market slack shrinks, we would expect wage growth to slowly pick up. In our view, the Fed would probably be comfortable with wages accelerating by about 0.5% per year, bringing wage inflation back to normal by the end of 2016.

Of course, Bank of America has its own axe to grind: that the Fed will continue its easy policy indefinitely. Perhaps: if one goes by wage inflation as the driver of unconventional policy, then sure. However, as we covered earlier, the main driver behind the end of QE had nothing to do with wages or hedonically-adjusted inflation (or deflation), and everything to do with bond market technicals, namely the soaking up of bond market duration by the Fed. Quite clearly, the Fed's primary (and only) directive - to push stock prices higher - has found its offset in the bond market offset, where liquidity is so low everyone is now complaining.

However, once QE ends, the question of just how reliable good, old-fashioned ZIRP will be to keep stocks at record high manipulated levels remains as unanswered as every other time when the Fed moved out from direct flow manipulation (see end of QE1 and QE2). It is here that the Fed's forward guidance, the "dots", and so on, comes into play - Yellen is now desperate to show that there is no need to sell risk assets as long as the front-end doesn't increase, even as she hopes that the primary driver of price action was not ZIRP by QE.

So as for what happens if and when the Fed is fully out of the "flow" business by the end of 2014, the jury is still out. What is clear, however, is that anyone who has been calling for standalone rising wages as a function of either monetary and/or fiscal policy and the "improving" economy has so far been dead wrong. What happens to wages if the stock market begins to sell off in earnest hardly needs an explanation.

But for now watch this space closely: with all other labor market "forward guidance" indicators dead and buried (remember, in December 2012 the Fed promised it would hike rates once the unemployment rate hit 6.5%, a statement we mocked at the time for precisely the same reason why everyone else is mocking it now - namely the ongoing collapse in the labor force), wage growth (or lack thereof) remains the key variable watched by Yellen, and by others who swear up and down rising wages as a progenitor to that long-await economic recovery.

So far, the economic recovery has yet to appear. What we do have, however, are endless reasons and justifications why not: such as "harsh weather", which somehow managed to chop off hundreds of billions in US GDP in the first quarter. Or China. Or Europe. Or Ukraine. Or younameit: after all the world is priced to such perfection anything else happening needs an immediate excuse.

Perhaps a far more important question than whether wages will finally rise is how many more years after the NBER-defined end of the recession in 2009, will the US economy need before its performance is finally taken at face value, and the apologists are forced to, once and for all, shut up?

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ebworthen's picture

Who, that has a job not on Wall Street, is getting a 3.5% raise per annum?

These people live in the clouds.

knukles's picture

It's all them fucking illegal immigrants.  One of 'em who used to be my gardener who I fired for always being passed out cold on the "yob, mang" just replaced the guy who was both my brain surgeon and lawyer.

Wages going up, my ass...
Unless you're working for .gov or .bank

spine001's picture

The problem will all predictions is timing, timing is a b.tch. 

imapopulistnow's picture

I'm rereading Batra's book "The Great Depression of 1990"  He has great insights, but just missed out on the timing by a couple of years......

PT's picture

But, how can we have hyperinflation if we don't have wage rises?
"Oh, that's easy.  People will just borrow more money.  And the banks won't dare say no, otherwise the banksters won't get their bonuses, which will be very important in a hyperinflationary environment.  This time will be different.  Instead of every one carrying around wheel barrows full of cash, they'll carry around wheel-barrows full of credit cards.  One day someone will leave a wheel-barrow unattended at someone else will leave the credit cards and borrow the wheel-barrow... so they can use it as collateral, of course.  Banks will have whole divisions set up to handle rehypothecation of borrowed wheel-barrows."

"Wheel-barrows full of credit cards?  Won't people simply extend the line of credit on their home loan?"
"Initially yes.  But then the govt will crack down and say that you cannot extend a home loan just to pay for your weekly groceries.  Actually, this law will be pushed through by the Real Estate Institute to protect their members from lack of new home sales.  People will sell their houses for exhorbitant prices so they can buy a slice of bread, then they'll eat half a slice and use the other half as down-payment on a new apartment in a high-rise that hasn't been built yet.  But it will all be okay because the banks will project that in three weeks time, they can sell the new apartment for sixteen times asking price and do the whole thing again.  Plus, at that point, they'll let the customer borrow back the other half of the slice of bread.  The customers will be too hungry to notice that they have the leverage here - what is a bank going to do with 300 million half-slices of bread?  Storage fees will be way too high.  No, as long as you tell the bank that you did have a slice of bread, they can write it in their books as collateral of a whole loaf of bread, which they can then repackage and sell off a whole bunch of synthetic collateralized bread obligations and that will keep them alive for another week ..."

Clowns on Acid's picture

John Lurch Kohn just gave his foreign officed State Dept employees a 42% raise, but he still has not changed his yacht registration from RI to MA thereby still avoiding a 250k MA state tax bill.

It's easy to raise wages when your not paying for them.... 

daveO's picture

Last week, I overheard 2 guys talking in the restaurant. One was telling about his new job. Too much stress, and he's only getting $7.25(min. wage)/hr! This was a grown man in his 40's, not a teenager working his first job. The next time the econ. turns south the min. wage will have to be reduced or there will be millions more unemployed. 

ebworthen's picture

Right, I forgot the .gov cloud dwellers.

Back to work in the mines...

Chief Wonder Bread's picture

If it's 2% on avg as claimed, then the peasants must be getting a lot less. So if wage inflation isn't driving prices up at the supermarket - and those prices are rising big time - then what is? Is it greater demand in developing economies, China, etc., fueled by Fed zirp? Hopefully that bubble will burst soon.

oklaboy's picture

excuse me, pardon me,  but 50% of Amerika is gettig a raise, those that work for fed, state and local gubmint. Don't let little facts get in the way. and if you work for the State department, you get 42%. now were did I put my job application for Sectary of State?

takeaction's picture

When does it all come down?

Grande Tetons's picture

I will post the day I go long equities. The next will all come down. 

walküre's picture

Does working 25hr/day constitute a wage increase?

Winston Churchill's picture

No, that counts as being on a salary.

NihilistZero's picture

No, that counts as salvery.

FIFY :-)

imapopulistnow's picture

It could only be for one day a week thanks to Obamacare.

InflammatoryResponse's picture

you get the big money when you're working 25 hours a week at 5 different jobs.


and the added bonus of no health coverage.  pretty awesome eh?


Colonel Klink's picture

Bankruptcy of America Muppet Looting informing a tribe member he's wrong.  I wouldn't listen to either one.  Think for yourself and do your own assessment.  Letting others think for you is a sure way to end up broke.

Ol Man's picture

Inflation is, and always will be a monetary phenomenom.....



LawsofPhysics's picture

Meh, what could this primary dealer know that Rosy doesn't?

Oh right...


there is no mechanism fo true price discovery...

my bad.

bagehot99's picture

Price discovery is so yesterday.


Today we have unlimited, direct central bank inteventions, in perpetuity, and one day we will hit escape velocity!!


My advice is to buy stawks. 

NihilistZero's picture

Working people have been waiting for the economy to hit escape velocity since 2000...

Unless your a RE/stock specuvestor or working in jobs that directly support/enable it (.gov) you're in year 15 of the Greatest Recession.

buzzsaw99's picture

i read that baldy-ballmer is doing okay these days

101 years and counting's picture

Employee: "Hey boss, I've been here 5 years, I hardly take time off and always do as i am told.  But, i havent had a pay increase yet.  May I get one this year to help me afford the fed's inflation in food, energy and healthcare?"


Boss:  "You're fired."

buzzsaw99's picture

Boss: ...and my bonus just got bigger again. sweet!

eric89074's picture

I work at a call center in Las Vegas for a popular online shoe retailer and this is becoming a big problem and causing a lot of tension with the phone reps.

Fewer and fewer chances for advancement and raises and management keeps trying to tell us "we're going to create more opportunity we promise!" but it doesn't happen. I know they want to tell everyone tough shit and to leave if they don't like it but it will kill the already lowering morale and we won't be known as the happiest call center on earth anymore.

newworldorder's picture

Most call center operations factor in a 60%+ turnover rate in 4 to 5 years. Retail and McD type turnover is probably at 50% per year.

Bottom line - those industries do not care about employee unhappiness. There are plenty more workers available to take their place. If it were not so - these businesses would be closing their doors for lack of workers.

i_call_you_my_base's picture

Rosenberg's analysis might be right if the unemployment rate wasn't a lie. That's what's interesting about analyzing bogus data. All conclusions are also bogus.

OC Sure's picture

Honest workers don't need wages to rise.

They need prices to fall.

The terms of tyranny are designed to make up seem down and down seem up. Please stop using them.

It is not Inflation; it is theft.

It is not Deflation; it is replenishment.


PT's picture

You mean, "Honest workers with no debt".  (Could be a redundancy thing - how much debt does an honest worker have?  ... compared to a dishonest (worker or non-worker)? )

The "entitled" classes live off of rent, over-inflated real-estate prices and over-inflated stock prices.
TPTB live off of the interest they charge everyone else.

Lower prices aren't coming in on their watch.

Except, of course, lower wages, and then somehow the wage / price mismatch has to re-assert itself in the real world, hence my comment re hyperinflation above.

Bemused Observer's picture

Either wages head up, or prices will start heading down. They have to meet somewhere, folks. So, either start compensating labor properly, or knock a few zeros off of your asset portfolios. The economy doesn't care which one you do, and if you don't pick one, one will be chosen FOR you.

daveO's picture

Bail-ins around the corner.

GreatUncle's picture

Yep the price banksters set through fiat paper is an estimate the reality and the realistic price whatever it is is what people can afford. So actual incomes defines the eventual price not bankster estimate.

Now I find property prices amusing, up, up, up as more multiples of income will be required. This then means those people who do this then have children  do not seem to realise their children will end up having to borrow an ever larger multiple of earnings too ...

Seen alot of these parents bitch and moan about this well you created it.

These parents by their actions, choices and desires drive prices up ensuring a fully laden debt future for their children.


Amazing ... should lock the parents up for child abuse.

Dr. Engali's picture

I heard that they are going to up our rations of chocolate soon.

Colonel Klink's picture

From 20g to 5g, a .25 double digit increase.

Al Huxley's picture

Report to Minitru immediately, your evident talents are required there at once.  And remember, Big Brother is watching you.

Colonel Klink's picture

Jawol!  Will mein Fuhrer Obama be present?

Shizzmoney's picture

"Hershey: Soylent Green Chocolate" coming soon!

Rican's picture

Wish they'd all hold their breath forever.

Mr Giggles's picture

Wages will dwindle to nothing over time. Assets will colapse over a W/E. If there is no fair value you are trading an illusion. Still, gonna get a smile from the looks on the faces when stawks, bonds & RE. all go together.

+1 Bemused Observer.

Shizzmoney's picture

Wall St = .gov

I also have 4 reasons why wages will never rise:

A) Lobbyists

B) Propagandists

C) Lobbyists

D) Batons

Itchy and Scratchy's picture

Public service wage inflation is doin' just fine!

newworldorder's picture

You are correct as it applies to all local, state and government jobs.

It also applies to labor union increases in both public and industry unions.

It also applies to mid/large Fortune 5000 and Private Fortune 1000 companies that average 2+ % year over year salary/performance increases, All these workers are doing OK.

The unemployed, part time, self employed and millions of Mc D type employees are SOL.



I Write Code's picture

As Fed Chair Janet Yellen has suggested, in a normal labor market we would expect wages to grow at about a 3.5% rate: 2% to cover the rising cost of living and 1.5% to cover productivity gains. Currently, downward pressure from high unemployment is holding wage growth to just 2%.

2% my ass.  This month's report said flat 0% and that is optimistic.  Peel off the top 1% and the trend of the 99% is negative.

Similar article from NYTimes today:

In Tepid Wage Growth, a Potent Sign of a Far-From-Healthy Economy
David G. Blanchflower, an economics professor at Dartmouth College, and Adam S. Posen, president of the Peterson Institute for International Economics, argue in a new paper that the slow pace of wage growth is the best indicator of an incomplete economic recovery. Until wages start rising more quickly, the economy remains far from healthy.

No kidding.

JRobby's picture

You can see the rising wage pressures. Just look at all the shuttered retail space and the non stop push to move cars off lots that are jammed w inventory. Its real!!!



Ban KKiller's picture

The Criminals at Bank of America? FUCK YOU! See you in court tomorrow where we will win.