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Wages Continue to Grow and Continue to Fall Behind

CAMS Weekly View from the Corner – Week ending 10/7/2022

October 10, 2022

With each passing month we continue to see official employment reports reflecting on-going job growth in the U.S. with a simultaneous increase in wages.  This past Friday the Bureau of Labor Statistics (BLS) informed the citizenry that 263,000 jobs were added in the month of September. As an aside this continued to surprise collective market participants as they, yet again, reacted negatively to the healthy employment gains.  This has become a trend with anything related to employment or price inflation data as it seems, per their reactions, they have an underlying belief that the Federal Reserve is not as behind the price inflation curve as it seems and with this they are close to ending interest rate hikes. Upon seeing X data point related to employment/price inflation said participants react as though they had a different expectation.  Strangely, this reaction occurs even as X data points come in generally as was expected prior to the release. We digress in that today’s edition is not focused on market action but rather a more structural look at the socioeconomic backdrop. With each passing month collective households are showing they are struggling with the price inflation backdrop which leads us to curiously ponder how long they can continue to struggle before it leaves a mark on the broad economy. Wage Growth – It is Always about Real Wages Strewn throughout each employment report is a hodgepodge of various details related to the overall storyline of the employment market.  Wages are a measure that is included along with the yr-over-yr growth of said wages. We have continued to see wage growth rates that are elevated above any recent growth rate to be certain.  Directly below are wage growth rates for all employees in the private sector for the past decade-plus.  The red circle identifies a consistent 5% and above reading while our red horizontal line highlights how elevated these wage growth rates are compared to the history depicted.  The problem occurs when we get real.

In economics anytime the word “real” precedes X data point you know said data has been adjusted for price inflation.  Think of real as a deflator if you will.  That is, you have X positive number that then gets reduced by the price inflation rate which provides the real number – i.e. the price inflation adjusted number. For collective households who continue to receive relatively outsized wage growth increases (per chart above) it is the real part that is hurting them as they participate out in the general economic storyline and realize their increased wages continue to fall behind. Below is the same decade-plus chart of wage growth rates for all employees in the private sector as is shared above.  This time though we have adjusted (think deflated) said wage growth rates by the level of the well recognized CPI – Consumer Price Index. Our red circle denotes that real wage growth rates have been negative (below the faint blue horizontal line) since April of 2021.  This is a long period of time that is now passing the year and a half marker with no expectation of change coming anytime soon.

Retail Sales – It is Always about Real Sales Just like wage growth rates retail sales in the U.S. have been quite strong.  As goods and services are priced higher and higher (think on-going multi-decade high price inflation) collective retail sales figures post quite strong results. A problem is beginning to surface when we adjust retail sales to price inflation in order to see the growth rate of real retail sales.  Directly below is a multi-decade chart of yr-over-yr growth rates for collective retail sales that are adjusted to price inflation.  A brief casual look of the overall chart will inform you that these real sales are historically and consistently above the faint blue horizontal line reflecting positive real retail sales growth levels.  Problems begin when these real sales go negative for an extended period of time or when they drop rapidly.  This result historically brings recessions which are noted by the faint blue vertical bars on the chart. Current day our red circle denotes that real sales are beginning to struggle to stay positive.  This is worthy of close observation going forward because, as stated, when these begin to consistently trend negative it reflects overall economic issues are surfacing.

The overall theme shared above is collective households are struggling more and more with their wage growth rates underperforming the level of growth in price inflation.  With this we cannot help but wonder how long they can continue to operate in the multi-decade price inflation economic backdrop before their struggles show up in real economic numbers. If this unfolds to an obvious recessionary environment then our on-going true bear market view for the stock market will continue to present itself as recessions historically increase stress in risk assets to include stocks. Under all of this is the structural health of the everyday collective household.  As near-term editions rollout we will occasionally look at the structural health of households as told through large macro numbers related to them.    I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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