Headlines from the BLS report on November payrolls were focused on the jump in average hourly earnings, to 0.37% m/m from 0.12% m/m in October. The November 0.92% m/m increase in the aggregate payroll index (product of wages and employment) compared to 0.32% m/m gain in October also stands as evidence of more money ready to flow into the consumer economy.
The media and assorted economic cognoscenti should, however, not run too far yelling “The Consumers are coming!” A fair read of the data underneath suggests a good part of the increase came from more high-wage jobs and an overall increase in the number employed overall, rather than inflating income. This more constrained tale is told by looking at the three-month rate-of-change for average hourly earnings in various industry sectors and the simple average of these wages (not weighted by employment in each sector).
Average hourly wage growth is moving in all sorts of directions, up and down, depending on the industry, as befits a well functioning market economy. The simple average, however, remains subdued in its pace of growth. The difference between this year and last for the three-month rate-of-change of this simple average is essentially the same as it was last year, running at around a 2% annualized pace.
This overall lack of acceleration for wages of those already employed explains, in part, why y/y growth in wages and salaries still runs marginally ahead of the y/y growth in credit, based on the October consumer credit report from the Fed. At this point in the recovery, and given the recent level of payroll growth, the economy should have begun delivering consumers borrowing faster than wage growth. Borrowing, however, is all about confidence and the current data suggest confidence still isn’t there. Also absent from the economy is a rapidly growing cohort in prime age to borrow to spend on big assets, such as a home.
Thinking about that, we were wondering whether the recent drop in mortgage yields made people more inclined to buy a home than they were six months ago. We did a quick one question survey and the answer was a resounding no, 80% to 20%. The answer was pretty consistent across all ages and circumstance. With the percentage of 25-to-34 year olds being employed back on the rise there is still reasonable reason to hope for increased spending in the months to come, especially for a stronger spring season for home buying.
The consumer economy has the power to grow a bit faster in the coming months – assuming the November data aren’t revised away. We do not, however, yet see the impact of jobs and income data on consumer spending. One reason is that underlying wage growth remains subdued and, as such, the confidence to borrow to spend is lacking. At some point a faster pace of consumer spending seems more likely than not, aided in part by foreign events holding down inflation and interest rates. Any consumer upturn is, in our view, still likely to underwhelm -- the nation’s age distribution works against the return of the 80s-90s consumer and constrained credit behavior among borrowers and lenders makes a return to the 00s consumer equally improbable. Those foreign events helping lift consumers near-term are also, in our view, working to slow the economy by the second half of next year. The optics of near-term economic data should nevertheless prevail on market and FOMC sentiment and thereby pull forward the timing of the Fed’s opening bell for the start of its run for raising rates – we think March. The market is now up to 50/50 on the idea.
