The Good News The Financial Press Keeps Missing

The financial press consistently is reporting inaccurately about real consumer income – which accounts for 70% of economic activity. Even the best outlets for news are making the same mistake.

The false and gloomy narrative, which is being repeated across all of the major media outlets we checked, showed up in The New York Times today.

“The bad news is that wages and incomes are rising more slowly than what has been normal in recent decades,” says Neil Irwin, whose economic analysis is otherwise accurate.

Mr. Irwin’s column is reliably valuable, but today it left out important facts about consumer income in real terms.

In fact, after the release Wednesday by the U.S. Bureau of Economic Analysis of average hourly earnings figures showing a 2.5% gain over the 12 months through July, the entire financial press corps appeared to have made the same mistake.

The 2.5% that is the focus of the media does not take inflation into account and, after inflation, it is not “right at the level at which it is has bounced around for years,” as reported by The New York Times.

The 2.5% wage growth figure for the 12 months through July actually represents a marked divergence from inflation, boosting real purchasing significantly.

In the last expansion, shown in the lower left of this chart, the inflation rate tracked with growth in average hourly earnings, eating up almost all of the gains in wages earned nominally. In the middle of the last recession, inflation began tracking less closely with wages, and the divergence has grown wider in the last three years.

Deflating wages by the inflation rate shows the sharp acceleration in real wages in 2017.

While real wages were stagnant for the five years following the last recession, real average hourly earnings have actually grown fast for three years and stand at a record high.

Rising from a $24 hourly rate in March 2006 to $26.30 at the end of June 2017, the growth in real hourly earnings in the last decade represents a 10% increase in real purchasing power.

The financial media en masse appears to be stuck on a story that was true until 2014, but has changed significantly since then.

In addition to not reflecting inflation, the 2.5% nominal wage growth figure that is the focus of the media does not account for all of a consumer’s income. The untold part of the story is that wage growth represents 60% of real disposable income. This chart shows the other 40% of real disposable personal income (DPI): rental income, dividends and interest, proprietors’ and payments from the government, as well as wages and benefits.

The 2.9% compound annual growth rate in real DPI is better than the 2.8% growth rate in real DPI of the last economic expansion. The 3.2% compound annual growth in real personal outlays compares favorably to the 3.5% of the last expansion – especially since it is debt-fueled and unsustainable.

Moreover, the financial press is largely ignoring another subtle but important factor affecting consumer spending – the change in the nominal savings rate. From the middle of The Great Recession until 2013, the savings rate was much higher than the historical norm of about 3.5%. Because consumers are feeling more confident about the economy, the savings rate is now near its historical norm, freeing up more consumer cash to spend.

While there are four factors adding up to U.S. economic growth, the most important is consumer activity. Consumers account for about 70% of U.S. gross domestic product (GDP) growth, making it by far the most important factor in growth.

While consumer spending was initially expected to rise by 1.9% in the second quarter of 2017, the latest GDP release was revised upward to 2.3% – boosting expectations for GDP growth in the second quarter from 2.6% to 3%. This was a positive surprise.

GDP growth derived from greater consumption is not just more influential on the economy’s overall rate of growth, it is also a good kind of growth.

Growth in consumption is not coming from the government, but rather from the private sector. This is a favorable long-term trend because the private sector is where jobs are formed. At 3%, the private sector is growing faster than in recent history.

The price of the Standard & Poor’s 500 stock index closed Friday at 2476.55, up 1.4% for the week.

U.S. political uncertainty, a natural disaster, the standoff with North Korea, or a totally unexpected event could trigger a 10% or 15% drop in stock prices at any time. However, the economy shows no sign of weakening and a recession and bear market are not on the horizon. Despite the somewhat gloomy picture presented in the financial press, the 98-month expansion – the third longest expansion of the post-World War II era – could continue for many months, and stock prices could be driven higher still. And real wages are growing fast, though the financial press seems oblivious to it.

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AHE includes 100% of non-farm private employees, and excludes benefits and employers’ share of payroll taxes. Compound annual growth rate March 2006 through December 2008 = 3.4%; CAGR December 2008 through August 2017 = 2.2%. March 2006 average hourly earnings of $20.04 inflated by the personal consumption expenditures deflator (PCED).

Major Indexes For Week Ended 9/1/2017

Index Close Net Change % Change YTD YTD %
DJIA 21,987.56 +173.89 0.80 +2,224.96 11.26
NASDAQ 6,435.33 +169.69 2.71 +1,052.21 19.55
S&P500 2,476.55 +33.50 1.37 +237.72 10.62
Russell 2000 1,413.57 +36.12 2.62 +56.44 4.16
International 1,938.37 +10.57 0.55 +254.37 15.11
10-year bond 2.16% -0.01% -0.29%
30-year T-bond 2.77% +0.02% -0.29%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.