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Near Perfect Correlation Between Wages And Spending Bodes Poorly For Economy

Tyler Durden's picture




 

Two weeks ago we solved the mystery of America’s missing wage growth. Despite a steadily falling unemployment rate, gains in real wage growth have proven illusory since the crisis much to the chagrin of the Fed and now to Janet Yellen, who says that although a pickup in wages isn’t a “precondition” for the fabled rate liftoff, wage growth does remain “sluggish” suggesting “that some cyclical weakness persists.” As it turns out, four-fifths of American workers would likely agree because as we showed, for production and non-supervisory employees, wage growth is falling steadily: 

Meanwhile, America’s bosses, the “supervisory” minority, have seen their pay rise swiftly of late:

Given this, we drew the following set of rather logical conclusions: 

Yes - wages are growing, for those who least need said wage growth, the "people in charge."

 

In other words, precisely all those economists who day after day repeat that, damn what reality says, wages are rising.

 

Well, guess what: they are absolutely right... when referring to their own wages! It is the small matter of everyone else's wages that they are dead wrong about.

 

So the next time anyone asks why there is no broad-based pick up in consumer retail spending across the entire population, just show them the above charts.

It’s against this backdrop that RBC recently made a rather stunning discovery: wage growth matters when it comes to consumer spending (that piece of the economic puzzle that accounts for two-thirds of GDP growth). In fact, now that Americans have learned the hard way that taking the Lehman approach to leveraging household balance sheets can and will lead to financial ruin, wage growth matters far more than it used to. Here’s more from Bloomberg

The link between earnings and consumer spending has been tighter in this expansion than in any other since records began in the 1960s, according to calculations by Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York.

 

Wages have become even more critical as households, still shaken after being caught with too much debt when the recession hit, remain unwilling or unable to tap home equity or let credit-card balances balloon to buy that new television or dishwasher. By not overextending themselves again, Americans are only spending as much as their incomes will allow, meaning that 70 percent of the economy is riding on how fast pay rises.

 

“In an environment where credit is not being used in a material way, the fate of wages matters,” Porcelli said. “They’re doing all of the driving from a consumption perspective.”

 

The correlation between growth in wages and consumer spending adjusted for inflation stands at 0.93 since June 2009, when the recovery began, according to Porcelli. A reading of 1 means they move in the same direction all the time, zero means there is little relationship and minus 1 means they continually diverge.

So the correlation is nearly perfect at a time when 80% of the employed labor force are seeing their wage growth heading in the wrong direction which seems to explain why “low-income” respondents to the UMich Consumer Sentiment survey were feeling decisively less optimistic about their spending plans this month: 

Consumer optimism slipped in early March among lower and middle income households (-6.5% from February) while confidence improved among households with incomes in the top third (+3.2%)...

 

Among those with incomes in the top third, strong gains were concentrated in the near term outlook for the economy and buying plans.

We would suggest that this does not bode well for Richard Fisher's “epicenter” of economic prosperity going forward. 

 

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Sat, 03/21/2015 - 17:05 | 5913702 wendigo
wendigo's picture

I may spend the rest of my life wageless. My spending however will not go to zero. 

Sat, 03/21/2015 - 17:12 | 5913727 Chuck Knoblauch
Chuck Knoblauch's picture

Enjoy the freedom of living off the land.

Sat, 03/21/2015 - 17:24 | 5913754 Publicus
Publicus's picture

Print money to pay salaries to fund jobs and economic activities, it's as simple as the game of monopoly.

Sat, 03/21/2015 - 17:33 | 5913772 knukles
knukles's picture

 

 

                             scratching head, wondering why income and spending have any relationship, is correlation causation or are they lying to me again, we have all the checks we need

Sat, 03/21/2015 - 17:49 | 5913812 insanelysane
insanelysane's picture

On Friday CNN had someone from the government stating that wages were growing.  

Someone is lying and I'm wondering who.

Sat, 03/21/2015 - 17:58 | 5913821 knukles
knukles's picture

Well, all them goobermint layabouts always get raises, regardless of the general level of economic activity. From their perspective, wages always grow, employment always expands, benefits always increase and tasks (waste of money) always become more plentiful; they do not experience the "real" world.

Sat, 03/21/2015 - 18:00 | 5913824 Thomas
Thomas's picture

Plots are being misinterpreted. While they show different changes over time, both of the top two plots show an approximately average wage growth over the last five years of about 2% per annum. Don't get faked out by the slopes or lack of correlation.

Sat, 03/21/2015 - 20:08 | 5914093 philipat
philipat's picture

"I may spend the rest of my life wageless. My spending however will not go to zero."

So either your savings decline OR Government spending (On benefits) and so the national debt goes up. Or both. The net effect in macro terms is the same. Further, your consumption may not stop but at best it will be static and it isn't going to increase. Static consumption means static GDP.

This really isn't rocket science. In an economy comprised 70%+ consumption, for the economy to grow, consumption has to increase, and with real disposable incomes declining, that isn't going to happen.

That is why monetary policy never was and is not the answer. The US needs major structural reforms and/or a new economic model which, however, is not going to happen because they are not in the best interests of the fascist elites in a thoroughly corrupt and broken socio-political "system". The only thing which will (Perhaps) force change is an economic collapse, and even then there is no guarantee.

Sat, 03/21/2015 - 18:00 | 5913831 negative rates
negative rates's picture

The media are gvt spys with a minor in judicial matters.

Sat, 03/21/2015 - 17:18 | 5913741 spinone
spinone's picture

Wages are not wealth

Sat, 03/21/2015 - 17:07 | 5913712 Chuck Knoblauch
Chuck Knoblauch's picture

If Obozo was a true communist, he be advocating unionization.

I suppose he's just an ordinary fascist afterall.

Sat, 03/21/2015 - 17:14 | 5913729 BlowsAgainstthe...
BlowsAgainsttheEmpire's picture

The President is not a fascist - just a neoliberal tool.  For real fascists, you need to go further to the right.  You're there when you hit the Republican Party.

Sat, 03/21/2015 - 21:26 | 5914117 philipat
philipat's picture

Politics is a continuum. Imagine a sphere. Go too far to the left or to the right and you finish up in the same place....

Thu, 03/26/2015 - 17:48 | 5931310 MeelionDollerBogus
MeelionDollerBogus's picture

They're the same party - the Pentagon Northrop Grumman party.

Only an idiot can't see this.

I can't believe you still were tricked into thinking the Demopublican party is actually 2 parties.

Sat, 03/21/2015 - 17:49 | 5913749 ZerOhead
ZerOhead's picture

This could be turned around in a nanosecond with the implementation of my "Everyone Can Be A Bankster" bill.

Simply pledge the kidney of one or two family member as collateral worth $50,000 each that allows you to create ONE TO TWO MILLION dollars worth of mortgages for your neighbors and friends without having a penny in deposits just like the big banks do.

Lend at say 5% and you can immediately make a banking income of almost $100,000 per year. And no need worry about losses since the Fed always has your back...

Sat, 03/21/2015 - 17:32 | 5913775 ebworthen
ebworthen's picture

The insurance premiums under the A.C.A. are astounding, not to mention the deductibles and co-pays.

Even for the "surpervisory" class, the premiums are punishing - mortgage sized monthly premiums of $1,000-$1,500 per month or more - for basically nothing.

People get paid next to nothing - or if they get paid - they are bled inside and out.

The lack of blood shows in consumer spending.

Thu, 03/26/2015 - 17:47 | 5931305 MeelionDollerBogus
MeelionDollerBogus's picture

Just insane. In Canada what your taxes cover for health CARE, not insurance, would be not even $300 in a year.

Sat, 03/21/2015 - 17:40 | 5913795 Winston Churchill
Winston Churchill's picture

You can't get blood from a turnip, but then again most turnips are smarter than the US public.

Sat, 03/21/2015 - 17:59 | 5913825 knukles
knukles's picture

My turnip is smarter than my neighbor's honor student

Sat, 03/21/2015 - 18:02 | 5913833 negative rates
negative rates's picture

My yeast is smarter than your turnip, and less than a dime.

Sat, 03/21/2015 - 18:03 | 5913842 Winston Churchill
Winston Churchill's picture

How edible is your neighbors honor student though ?

Sat, 03/21/2015 - 19:11 | 5914064 knukles
knukles's picture

LOL 
That's just wrong.

Sun, 03/22/2015 - 10:25 | 5915218 Government need...
Government needs you to pay taxes's picture

IF we're talking about eating the neighbor/turnips, why not feed the turnips to the neighbor, then eat the neighbor?  Variation on the turducken theme.

Thu, 03/26/2015 - 17:45 | 5931298 MeelionDollerBogus
MeelionDollerBogus's picture

Soylent Green Eggs and Ham?

Thu, 03/26/2015 - 17:44 | 5931295 MeelionDollerBogus
MeelionDollerBogus's picture

LOL

Sat, 03/21/2015 - 18:29 | 5913904 tumblemore
tumblemore's picture

In the short-term driving down wages makes oligarchs richer - hence why they bribe congress and the media to say mass immigration and off-shoring is good for the economy as a whole when it clearly isn't - but in the long-term it is obviously deflationary and is driving the entire western economy off a cliff.

 

Sat, 03/21/2015 - 18:40 | 5913944 hooligan2009
hooligan2009's picture

nothing to see here, move along.... spending on taxes, health and education by those who still pay taxes, need health care and can borrow to buy a degree (that no employer can use and that should be free on the internet) will return "discretionary" spending to a steep increasing path this year, next year...and the next, and the next...

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