“Wage growth has hit a wall,” economist Joseph Song, wrote in a report for Bank of America. Analysts had expected 4 percent growth but were taken aback at 3 percent and sometimes lower depending on an employee’s position. Overall, raises ended up just over 3 percent in August 2018, down from 3.4 percent in February on their way down further. But manufacturing wages have increased by only 2 percent, more about that and what it means in a minute. Why have wage increases showed?
Economists blame three things among others, the trade war with China, a slowing economy, weak productivity growth, and low inflation. But two more things are often ignored, surplus workers and high corporate debt.
Surplus workers? But the official unemployment rate is at an historic low 3.6 percent. That’s misleading. The Bureau of Labor Statistics provides another figure they call U-6 that is rarely reported. That includes “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons.” That also includes people who have given up finding work for whatever reason but would work if the opportunity presented itself. The unemployment figure when those people are included is 7 percent. The official unemployment rate is called U-3 by the Bureau of Labor Statistics, and that includes “Total unemployed, as a percent of the civilian work force.” Who’s included in the work force? Only those with any kind of job, part time included, and those actively looking for work.
But there’s more. The labor pool has increased with 63.3 percent of Americans working or looking for work in October, the highest since 2013. That larger multitude of available workers lets businesses be more parsimonious in their wage increases.
The last two times the “official,” U-3, unemployment rate was at 7 percent were in 2008 during the recession, when it was on its way up to 10 percent in 2010 and then in 2012 when it was on its way down from recession highs.
Then, there’s the pool of 4.4 million just part time workers who would like to be full-time workers. They mean employers don’t need to raise wages much because they are available to be made full-time at maybe current wages. Add to that the 4.9 million, officially counted or not, who want a job but can’t find one and there is a pool of workers just wanting a full-time job and ready to work for current wages.
Interestingly enough, while all non-supervisory workers’ wages have increased an average of 3.5 percent, supervisors wages slowed considerably to 1.8 percent in October. The reason for that is that their pay includes bonuses for meeting sales targets, reports Joseph Song. A “sputtering economy” and lower corporate revenue because of uncertain foreign trade revenue are sometimes the cause. Not selling means lower profits in addition to lower pay.
Add to that lower productivity. Productivity drives wages up or down. The tax cuts helped productivity because companies bought new equipment thus increasing the amount workers could do, raising wages. However, since early 2018, investment in equipment has slowed to a trickle as companies hunker down fearing a slower economy, slowing wage increases.
Factory employment amounts to only 8.4 percent of the workforce, but it has an imposing effect on the pay of all US workers because manufacturing workers tend to earn higher salaries than other workers do, says Joseph LaVorgna of the research firm Natixis. As mentioned at the beginning, their wages are up only 2 percent, thus dampening wage increases across the board.
Inflation drives wage increases, too, but inflation has been mostly absent. The Consumer Price Index has been falling, or increasing at a slower rate, and stands at 1.8 percent in October. Supposedly that’s partly due to online shopping, and expectations of lower price increases because of a “globally connected economy,” says Sophia Koropeckyj of Moody’s Analytics. More inflation of course means higher prices and so employers have to compensate workers so they can buy things at higher prices. But low inflation means there’s little pressure to increase wages.
What does all this mean? Different economists think different scenarios. But here’s another wrinkle to consider. Corporate debt has skyrocketed to a never before seen $10 trillion. Even though some of this country’s best-known companies have borrowed considerable amounts, most of the borrowing this year has been by weaker, BBB Bond-rated companies. They have borrowed money for “financial risk taking,” such as payouts to investors and dealmaking on Wall Street rather than new plants and equipment, reports the International Monetary Fund. That means the borrowed money won’t produce any income much less profits. And they’re borrowing at rates that only the top companies could get a few years ago because the Federal Reserve lowered interest rates. These borderline companies thought let’s grab some of that with little interest but not use it to make more money and increase profits. Disturbing thinking.
Emre Tiftik, a debt specialist with the industry association Institute of International Finance is concerned. He said, “we are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion.”
The economy keeps growing, but not particularly fast, only 2.1 percent annual rate, virtually the same as the average since the end of the recession in 2009.
The unexploded bomb could go off if there’s an unexpected shock such as a breakdown of US-China trade talks, a Persian Gulf military conflict, an oil shortage, or something we just haven’t thought of yet. Out the window would go economists’ rosy outlooks. Gregory Venizelos, a credit strategist for AXA Investment Managers in London said “You can definitely think of an Armageddon scenario.” And last year the Federal Reserve warned about the rapid increase in risky corporate debt.
Everything may be all right, but red warning signs and klaxons are there. Slower wage increases, surplus workers, weak productivity, slower sales and bonuses, and $10 trillion in corporate debt are disturbing.
By Robert L. Cain
