The Bureau of Economic Analysis (BEA) released significant wage and salary data yesterday which held stunning upward revisions for 2018 and 2019. Wage growth of 5.5% combined with low inflation remaining at 1.4 percent; the disposable income of U.S. workers jumped to a stunning 4.1%. [Data Tables]
Within the revised BEA data, we find employee compensation rose 4.5% in 2017 and 5% in 2018. Importantly the growth trend continued into 2019, with compensation increasing 3.4 percent in the first six months alone. Year-over-year wages and salaries were revised upward to 5.3% for May, and 5.5% in June. These are stunning increases in worker pay.
There are various economic indicators we have shared through the years, but wage growth is one of the more critical. First, wage growth lags behind business activity – workers don’t get pay raises until after business volume demands/provides it. Second, wage growth is generally uni-directional – once businesses hike pay, the increases cement.
As the Wall Street Journal put it:
(VIA WSJ) […] Recall how liberals blamed “secular stagnation” as the reason worker incomes weren’t growing faster during the latter years of Barack Obama’s Presidency. Yet employee compensation has increased by $150 billion more in the first six months of 2019 than all of 2016.
Compensation increased 42% more during the first two years of the Trump Presidency than in 2015 and 2016. This refutes the claim by liberals that the economy has merely continued on the same trajectory since 2017 as it was before.
The economy barely skirted recession in the final Obama years, and economic policy changed in 2017. Deregulation has unleashed repressed animal spirits, especially in energy. Tax reform has also spurred business investment in new facilities and equipment, which over time should translate into higher worker productivity and wages.
Those reforms are continuing to pay economic dividends despite the damage from Mr. Trump’s trade policies. While Democrats and even some conservatives complain that workers haven’t benefited from tax reform, the evidence suggests otherwise. (read more)
SUMMARY: The U.S. consumer is driving the economy. The jobs and labor market remains strong. Wage growth is rising in proportion to the diminished availability of the labor pool. Price inflation is low because manufacturing economies (EU and China) are devaluing their currency, and subsidizing their industries (China), in an effort to avoid Trump’s trade policies (tariffs). Their efforts increase the value of the dollar and we are importing deflation.
Simultaneously, global manufacturers -multinationals- need access to the U.S. consumer market. As President Trump applies a series of strategic global trade moves, intended to draw manufacturing back to the U.S., those multinationals are in somewhat of a holding pattern for further investment. Simply, the multinationals are trying to figure out where to put their investment capital for the highest return.
Example: The U.S. economy is strong, unemployment is low and wage rates up; so if China is a non-option, the profit determination shifts. Where to manufacture? It might be more profitable for a multinational in either Southeast Asia or North America. The key is which country has a long-term agreement with the U.S. That’s why the USMCA is critical.
CTH still predicts POTUS Trump will eliminate the uncertainty as soon as the USMCA is ratified. I suspect President Trump will drop massive tariffs on all Chinese goods.
Think of China like a big lake filled with U.S. economic value. Through his Asian discussions with Vietnam, S Korea, Malaysia, Singapore, Australia, Japan, et al, President Trump has stealthily built a thin levy, an ASEAN dam of sorts, that will direct the China lake of economic value into Southeast Asia.
Once the USMCA is signed, Trump will blow the dam by triggering the tariffs. This will move all of the multinationals who are in a ‘holding pattern’, and capital investment will flow fast. The China exodus will benefit North America (USMCA) and those ASEAN nations who have partnered with Trump and made proactive trade agreements.