Why I’m worried about the decline in real wages
Why I’m worried about the decline in real wages
This is a follow-up to my post yesterday concerning the decline in real average and aggregate wages. Why should the data from just one month cause me to warn that “This is Bad?”
To show you, let’s decompose the data into CPI and nominal aggregate wages, shown in the below two graphs, the first of which covers the inflationary era of the 1960s and 1970s, and the second covers the disinflationary era since:
In the year prior to at least 5 (arguably 6) of the last 7 recessions, BOTH nominal aggregate wage growth was decelerating (1980 and arguably 1969 being the exceptions) and consumer inflation was increasing (1980 and arguably 2007 being the exceptions). The 1981 recession was caused by the Fed very aggressively raising rates, and in the other two instances the pattern held, but with much less of a lead.
Note that a very good coincident marker for the onset of a recession, within about 3 months, has been the point at which the trends intersect. i.e., where YoY consumer inflation increases to the level of decelerating aggregate payrolls.
Note further that in the last 18 months YoY consumer inflation has generally been increasing. Meanwhile there are some slight signs of deceleration in aggregate payrolls, highlighted by this past month.
So now let’s subtract YoY inflation from YoY aggregate payroll growth:
When the relative growth in payrolls decreases by 50% from its high (e.g., from 4% to 2%), that is a good marker for the onset of at very least a slowdown (e.g., 1966, 1984, 2016). EVERY SINGLE TIME the line has crossed zero it has indicated the onset of recession.
In the last 6 months, this line has been declining again, from 3% to 2%.
Since the inflation rate is more than anything determined by the price of gas, and I see no reason to expect a decline in that, and further we know that deceleration in YoY payrolls growth is a very regular feature of later expansions, so I see no reason for that to reverse (unless if for some reason the new leadership at the Fed decides to reduce interest rates).
So, there’s nothing imminent, but I am seeing what looks like the beginning of the trend that will ultimately end in a recession, maybe in 18 to 24 months. That’s what has me concerned.
people are taking home an average of $131 more a month after the Trump tax cuts, which might head off your recession…
To put another spin on things.
I’ve long believed that the inflation of the 1970s was born in LBJ’s guns and butter strategy in the late 1960s. It prevented a recession in 1967 when we had what was called a growth recession — below trend growth.
But the weakness did not cause a slowing of wage growth in 1967 and as growth reaccelerated after 1967 so did wages and inflation growth.
I believe that is very reverent now as we again implement a round of guns and butter fiscal policy. Many say we can not have 3% or more real GDP growth but I think that is a poor analysis. We can achieve 3% growth, but it will be above the growth of potential GDP and lead to an acceleration of inflation –especially if it is accompanied by protectionist policy that keeps cheap imports out.
Spencer: I agree, and actually referenced LBJ’s “guns and butter” budgets in another post I wrote thie past week about why deficits are going to start to matter that wasn’t crossposted at AB.
I can’t argue with you time frame concern for onset of next recession, BUT since a recession is an inevitable event then what you are concerned with is not IF a recession occurs, BUT WHEN it occurs, e.g.:
“….maybe in 18 to 24 months. That’s what has me concerned.”
I fail to see the import or significance of your concern with a recession 1.5 to 2 years from now — as opposed to 6 months from now, a year from now, or 3 years from now, or any other period than 1.5 to 2 years from now?
Perhaps it’s just that you’re concerned with a recession eventually occurring again, as they always have and always will, and that the time frame has nothing to do with your concern at all.
But if that were the case then there would be no special concern with the January real wage drop (that gave rise to your concern of a recession in 1.5 to 2 years).
Given the above then why not just say
“Based on Jan’s real wage loss and other factors……[list] I predict onset of the next recession will occur in 1.5 to 2 years from now.” since that is actually what you’re post is saying. Having a “concern” seems to be your use of an emotional aspect used to persuade? At least I can’t for the life of me figure out what your “concern” with onset of inflation in 1.5 to 2 years is or how it’s differentiated from concerns with inflation at any time.
Replace “inflation” with “recession” in the following:
” At least I can’t for the life of me figure out what your “concern” with onset of inflation in 1.5 to 2 years is or how it’s differentiated from concerns with inflation at any time.”
I do want to commend you though for marking your beliefs to a specific time period… at least that way your beliefs can be measured with respect their accuracy.
My own belief is that mild recession will occur well before your earliest 1.5 year onset time frame. “Well before” not quantified, but roughly at least 6 months before..
Your dcomposition chart (your last chart showing indeces) shows that CPI-U has been rising steadily since about 2016 sometime (your chart’s time resolution is poor).. for about the last 2 years or so. and this doesn’t exectly coincide with your prior “may be rolling over” Post’s chart steadily declining wage since July 2017..
Without trying to recreate your FRED charts for better time resolution in the relevant time period (since 2016 sometime), the general expectation from your dcomposition charts is that declining wages are the trend expected result since sometime in 2016.
Yet, you say this is why you’re “worried” (or “concerned”) about one data point (the most recent in January).
I don’t understand at all why a continuation of the trend which has been on-going for at least a year makes you “worried” about a recession in 1.5 to 2 years when the trend has beeing going in that direction already for months and months.
Were you surprised in January with the continuing trend? Normally, one might be surprised with a trend reversal of a significant magnitude, but certainly nobody paying any attention would be “worried” or “conserned” with a continuation of trend..
If you were surprised by January’s data point then why were you surprised by a continuation of the on-going trend? Had you expected it to reverse in January for some reason? or what?
So I cannot figure out what you’re so “concerned” about .. in fact hyper level “concerned” or “worried” with one post titled…..
(caps my own to emphasize the hyper level of concern you expressed)
— “This is BAD real wages *DECLINED* in January; MAY BE rolling over”
and the other
— “Why I’m WORRIED about the DECLINE in real wages”
…when the DECLINE is simply an unsurprising continuation of the past year or at least 6 months trend.
A subjective post on the subject of declining real wage would have simply said “the decline in real wages continues” and that this worries you “beecause if it doesen’t reverse then it will lead to a recession sooner or later” which is the most usual and normal expected outcome of continuously declining real wages… which can’t be surprising in the least.
You sound like the duffus who, knowing the weather forecast for rain over the present week after it’s been raining for a week already, exlclaims with head lines “Oh My God! Its RAINING!” as if you discovered something unknown.