2007-04-18 Follow-up

Had a follow-up discussion with the CIO:

As I told him, while we obviously don’t quite agree on what it all means,  the debate is worth the effort, as it could be crucial for determining economic and market prospects.

If, like him, you find the 0.9% income growth # startling, and maybe even hard to believe.

Lets put aside the issue of whether the data from a census based on 98% of U.S. jobs, which takes six months after the end of the quarter to be produced and released, is more reliable/believable than the data based on sampling 160,000 of the country’s 8.8 million employers, and then using a statistical model, etc., and releasing it on the first Friday after the month.

But, just given all the other economic facts, is 0.9% really more startling and hard to believe than 4.1%?

I.E. If we assume inflation expectations are typically around 2.0-2.5% (and that labour compensation agreements would, as you said, typically have that as a benchmark), is it more believable that income growth has exceeded that by 1.5-2.0% (your thesis) or trailed it by 1.0-1.5% (mine), given that:

-         Income growth is distinct from (i.e. a subset of) total compensation growth, which includes benefits on top of wages and salaries, and we know companies’ benefit costs (i.e. healthcare) have been growing substantially – are companies really paying out wages faster than inflation even while also paying health and other benefits at increasing rate?

-         And have they been doing that while also generating record profits? -- corporate profits as % of GDP are at record highs (see attached from StLooFed), so its hard to believe that income growth has exceeded total economic growth (4% vs 2.5)

-         personal savings rates are negative, so its hard to believe that income growth has exceeded personal consumption expenditures growth (which has been 3.2%, 3.5%, 3.5% and 3.7% in last four quarters) – if income growth was really greater than PCE growth, then why would savings be negative (particularly even while people still extracting home equity)

-         the manufacturing sector, particularly autos, is seriously struggling, and has had layoffs over course of last year

-         globalization and outsourcing have limited unions’ bargaining power

So, what seems more consistent with all the other evidence, income growth below or above inflation?

As for indicators (without waiting for a raft of massive layoff notices) that payrolls will be declining, how about:

1) Housing starts and completions signal loss of over ¾ of a million residential construction jobs:

 

2) weakening durable goods orders signal pending further losses in manufacturing jobs