A key economic benchmark for the Trump administration established back in the heady days of January as his inauguration was approaching was wage growth, most commonly measured through average hourly earnings. It is such an important barometer that central bankers are known to get twitchy when laborer wages get a boost, fingers at the ready to push the interest rate button higher. Back in January, it might have been a logical assumption that, with Trump coming into office and dreams of infrastructure spending dancing in the heads of economists, average hourly earnings would spike. Depending on the measure one uses to calculate wage inflation, that didn’t happen. This has Societe Generale’s Albert Edwards getting twitchy as he asks tough questions about wages and the political bias of economic analysts, particularly post-Brexit.
Inflation in the UK, once desired, is now despised
Interpreting economic numbers can be seen from a variety of different perspectives and, unfortunately, filtered through a political bias. Take inflation in the UK and greater Europe. Before the Brexit vote, inflation was a desirous outcome as the fear of an economy so sickly that deflation and concerns that the market would lay down dead were reoccurring nightmares economists thought might last for a decade or so.
But post-Brexit, economic analysts, most of whom badly missed the Brexit call, are looking at economic numbers through a political bias, Edwards observes. “Getting it wrong is a tricky thing to admit in this business,” as he points to how rising inflation in the UK is interpreted by economists:
Most commentators, including perhaps myself, see things as very black and white, depending on whether they were Leavers or Remainers. It would be a reasonable generalisation that most in the economics profession, especially those working in finance, were strong Remainers. Hence the greater than expected rise in the UK’s April headline inflation to 2.7% from 2.3% in March (and surging core CPI to 2.4% from 1.8%) is being spun as bad news. For most commentators this is a disastrous side-effect from the Brexit vote as a direct result of sterling’s slump. It will squeeze household real incomes and slow GDP and we can blame all those idiots (like me) who voted to leave the EU for this.
Edwards notes that, placed in proper perspective, UK inflation data isn’t much different from that in the US several months back. He thinks the UK inflation rate is driving the nation “away from the deflation tipping point.”
Edwards cheers inflation and in particular wants to see worker wages go higher. “Hey who knows, as the UK actually manages to meet and exceed its inflation target at both the headline and core level, maybe Mark Carney and the Bank of England might even raise interest rates but I’m being silly now… that really is too much to expect.”
Are average hourly earnings the best wage measure in the US?
While economists in the UK are eager to dismiss inflation based on political narrative, that isn’t the only place avearge hourly earnings has Edwards scratching his head.
“What on earth is going on with US average hourly earnings?” he questions, noting three US unemployment reports that have surprised by their tame provocation. The weakness in headline reports, which Edwards had anticipated to be glaringly positive amid a world of stimulative economic energy has, like the Trump administration economic agenda, appeared to morph.
This falling down on wage inflation is odd as headline consumer inflation has been surging. Prices going up but wages remaining stagnant isn’t the recipe for success Edwards was expecting.
But here her Edwards might want to quote Mark Twain when he said: “There are three types of lies: lies, damned lies, and statistics.”
While average hourly earnings have been faltering, other corollary measures have shown signs of life. The US Bureau of Labor Statistics, through its Employment Cost Index (ECI), showed a slight improvement. Wage and Salaries moved from a 0.5% rise in the fourth quarter to 0.8% in the first quarter of 2017. While not keeping pace with inflation, it was the fastest quarterly rise since 2007. But adding benefits to the equation, total compensation rose by a strong 2½%.
While this might be good for average workers, it might eventually hurt the stock market. Edwards notes that wage inflation combined with sluggish 1% productivity growth means unit labor costs are rising by nearly 3% year over year. The problem is corporate America can’t raise prices that fast.
“The bottom line is that US corporate margins are suffering a savage squeeze and have been for some time,” Edwards notes, pointing to a disbelief in first quarter corporate earnings reporting. “What then do I make of the heady 1Q company reporting round? Not much.”
Time and time again, at this late stage of the economic cycle, US pro forma stock market earnings totally detach themselves from the weakening macro profits data. We only discover much later that the economic whole economy profits data were correct and the stock market profits (eps) data were being heavily manipulated (legally, usually) by imaginative accountants to look as if all remains well. The awful truth is only revealed in the subsequent recession when years of fantasy stock market profits get erased as below the line write-offs. The truth is that the closely watched average hourly earnings measure of wage inflation has not accelerated in response to a surge in headline CPI in the way I had expected. So strictly speaking I have been wrong and as such I must throw myself upon your bountiful mercy.
An economic analyst that actually admits to making a mistake. Now that’s news.