"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Tuesday, June 24, 2014

Average Hourly Wages

One of the factors that we are trying to closely watch here is anything that might result in the Velocity of Money beginning to rise.

From my armchair perspective, I am of the view that it is the slack in the labor market that has kept inflation pressures well at bay, in spite of how many years now of Federal Reserve Liquidity efforts, also known as Quantitative Easing. I have commented here many times that until that huge sum of "money" that has been created by the Fed, begins to make its way out of Wall Street and onto Main Street, inflation pressures are simply not going to build.

I think many of us who are regulars here view the current stock market rally into all-time highs, seemingly without ending, as a product of these QE programs and a ZIRP ( Zero Interest Rate Policy).

Simply put - if Yield is the name of the game, and it is, then the money flows to where the yield potential is the greatest. For the last several years now, that has been into the general equity markets and out of commodities in general.

Recently however, we have seen the Commodity indices all breaking higher, led primarily by sharply rising energy prices. We have also seen the TIPS spread hitting its highest level in 6 months. These are signs that inflation pressures are building, albeit rather slowly.

What the missing ingredient has been is rising wages. let's face it, the employment situation in this country is rotten. While some folks are indeed getting some long-sought for jobs, many of these are not high-paying. One of the few exceptions has been in the energy sector where things are on fire. There is a shortage of skilled labor there that is very real.

Today we say new home sales pick up so that is a good sign. Also, someone has to build these new homes so construction guys are staying busier than they have been for several years.

All of this is leading me to beginning focusing on another piece of economic data and that is the Average Hourly Wages numbers that we get from the government on a regular basis. For many years, employers have been in the driver's seat and have been able to choose and pick whom they want to hire and what they are willing to offer them in wages pretty much without any sort of hindrance. It has been, and to some extent, still remains an "Employer's Market".

We therefore might want to start watching more closely for any signs that this might be changing. If wages were to pick up, it should tend to see consumer spending rise and in terms of the Velocity of Money, perhaps begin to arrest that long downtrend. If that were to happen, the TIPS spread would widen out even more and the inflation genie would start pushing even harder against the cork that is presently in his bottle.

Here is a chart of the Wages data. I have taken the liberty to convert the data into PERCENTAGE CHANGES compared to the same period in the previous year. In other words, we can see what percentage wages are rising or falling from the previous year to gauge whether wages are beginning to ramp up.

Notice how wages ( again - on a percentage change basis) were falling throughout the height of the credit crisis. Layoffs, firings, hourly wage cuts, etc. all show up on the chart during that time frame. The Fed's QE programs finally seemed to kick in somewhat and arrest the downward trend but what I find really most interesting is the fact that since the decline ended in late 2009/early 2010, wages have essentially gone nowhere.

This is what I mean when I say wages are flat. It does not mean that they are not rising - it means that the rate of percentage change upward is not moving higher.

I believe this is the single most important factor in determining whether or not we see an outbreak of inflation from the Fed's monetary policies.

Remember they are bound and determined to generate inflation of at least 2%. To do so, they are going to need to see wages continuing to rise at a fast clip or at the very least, as fast as overall prices are rising in general.

When I look at the recent rate of increase in the cost of energy, and in the cost of meat for example, it does not take much in the way of math skills to realize that consumer wages are not keeping up with those.

Let's see how things shape up as we move forward. I see that there are several misguided efforts by politicians mandating higher minimum wages ( that is a self-defeating effort to buy votes anyway )  but they might just get some of that legislated into existence. I guess these economic nitwits think that business owners will just gladly surrender their profits and will not pass on higher labor costs to the general public. If we see a movement towards higher minimum wages, it just might be the catalyst to push everything higher for all of us.


  1. Dan, I think that we are going to have to see a reversal in current fed policy to ignite the spark (Wages, Inflation, Velocity, etc.) It is total Stagnation at the moment. Perhaps a stock market meltdown will be the Catalyst.

  2. The fed will not reverse itself. You will have 0 percent interest rates and fed jawboning.

    What is going to be interesting is to follow manufacturers. Dan mentioned that people are facing commodity inflation or gasoline going from the mid 80s to almost $110.

    Manufacturers with energy inputs are going to see margin erosion.

    The fed is stuck here. The economy can be hurt here. But when commodities start to fall, today or in November, the fed is not going to let the economy implode. Too much liquidity.

    But if these companies who have been buying their own stocks get in trouble with their balance sheets, look out. The leverage will unwind.

  3. Dan - thanks for the post another interesting graph.

    Lots of job seekers right now with very high unemployment rate - U6 is over 20% according to John Williams see http://www.shadowstats.com/alternate_data/unemployment-charts.
    With more supply (available workers) than demand (available jobs) hard to see overall wages rising any time soon. (the oil patch is one exception - those jobs are highly skilled high paying). a hike in min wages may try to "fix" that but it brings up the argument of even more people out of work because business don't want to (or can't) pay higher wages without squeezing profits. Especially in the services industries. Also with the ACA (Obamacare), it is becoming more difficult for many employers to sustain a workforce.

    It may take a new administration with more "pro business" policies to really get the economy going and more people back in the workforce (stuff like Keystone pipeline, and ending the war on coal). When the economy is cranking, there are more jobs, the supply /demand equation changes and increasing wages will likely be more persistent. If higher wages are the key to kicking off inflation, we may have to wait a while, imho.

  4. What's really going to interesting is the rate of inflation that the Fed will tolerate or ,ore to the point what the American people will tolerate. The real inflation rate is around 3% and the Fed, Yellen. expressing the willingness to allow even higher rates, they say temporally, to boost wages its going to be interesting to see who wins that race.

    If higher rates of inflation simply boost demand for gold and silver and destroy demand for washers and dryers then its game over for the whole reflation meme.


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