With the Fed hiking rates in order to signal a "return of confidence" to the economy, one - the most important - aspect of a recovering economy continues to be absent: rising wages.
As the following chart showing the annual growth in wages of production and non-supervisory workers (who make up 83% of the US workforce) reveals, wage growth is not only well below the Fed's goal of 4.5%, at 1.7% it is below the Fed's goal of 2% inflation, suggestion that on a real basis wages would be declining if the Fed had attained its 2% inflation mandate.
[3]
So instead of relying on actual, historical data (seasonally adjusted as it may be), the economic permabulls are pointing to surveys, and especially the respondents to the National Federation of Independent Business (NFIB) question showing what percentage of businesses are planning to raise worker compensation. As the chart below shows, while actual wage hikes remain non-existent, at least CEO promises to raise worker wages are the highest they have been since before the financial crisis (at which point wage hike intentions promptly tumbled to 0%).
[4]
If this were true, it would be great news for America's long-suffering workers, who as we showed previously [5]are not only faced with stagnant wages, but are also facing hundreds of thousands of layoffs as a result of the record M&A wave which has resulted in over $5 trillion in global deals in 2015: great news for M&A bankers, terrible news for soon to be "synergzied" employees.
[6]
How rising wages make sense in a time when tens if not hundreds of thousands of skilled, well-educated workers are about to be the result of synergies is not exactly clear, but let's take the CEO's promises at face value.
Here, however, a problem emerges.
Because if companies are being honest about their intentions to raise wages, then US corporate profitability is about to fall off a cliff.
The reason: while companies continue to feel ever so generous when responding to the NFIB's survey, and increase raise intentions to boost wages with every passing month (just never this month) even they admit that it is impossible to pass through these wage hikes in the form of rising prices. As the chart below from JPM shows, the difference between "intentions to raise prices" less "intentions to raise wages" - a proxy for operating margins - has not been this negative in the 21st century.
[7]
This means that if companies are telling the truth about their business intentions in the near-term (raise wages, not raise prices), corporate profits are about to fall off a cliff.
The next question is "are companies telling the truth"? The answer: most likely not, and the truth is somewhere in between a 100% lie and a 100% truth. However, even if companies only follow through with a partial wage increase, what is most troubling is their pricing power self-evaluation. Clearly, US companies have never been this concerned about their ability to raise prices in the current stagnant economic environment, which also happens to be a far more accurate reading of the economy's true state than the Fed's rate hike "signaling."
Last but not least, if companies are indeed telling the truth, then one can forget about any earnings growth in 2016, leaving the entire "bull case" in the hands of P/E multiple expansion, expansion which will somehow have to take place as the Fed suggests it will hike rates at least 4 times in the brand new year...
