Here’s a couple of interesting charts on labor market dynamics and the stock market. Specifically labor’s share of profits, and wage growth. The reason these are worth noting is they’re often talked about in terms of the sustainability of the whole thing – be it the socio-economic effects, or the profits and profit margin outlook. Whatever your point of view, these charts should be interesting.
1. Labor share of profits
The first one is labor’s share of corporate income. Clearly this one moves in cycles, but there also appears to be what is either a structural shift or an enduring wound of the financial crisis. Either way, when this indicator rises it basically means pressure is coming on corporate profit margins. Historically this has only been a real issue if it moves by a considerable degree e.g. prior to 1987, the dot com peak, and pre-GFC. At present it’s a long way off those levels…
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2. Wage growth
The other interesting one is a weird indicator that you get if you subtract the fed funds rate from the Atlanta Fed’s wage tracker. What this indicator tells you is whether wage growth is higher or lower than the current fed funds rate. Why would it matter? An environment of wage growth and low interest rates is basically the sweet spot – that’s the conditions where the economy should be improving and markets should be going up. When the Fed funds rate rises above wage growth, that’s when the market is on borrowed time. At present this indicator is firmly in the sweet spot – i.e. don’t get bearish on stocks just because wage growth is picking up.
Bottom line: Labor market dynamics are important for the stock market, and at present those dynamics appear supportive, or at least not a headwind yet.