Are Wages Consistent With Recession?

The Observatory

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Diving into today’s note. Our primary takeaways are as follows:

• Our estimates for real incomes showed a sequential increase of 0.27%. Nominal income increased marginally, primarily driven by employment and wage inflation. Consequently, this strength has flowed to GDP via strong consumer spending.

• Wages remain entirely inconsistent with recessionary pressures. The strength of wages will likely continue to support consumer-centric equities.

• While wages remain strong, aggregate earnings expectations remain rich compared to our measures. Our Alpha Strategies are maintaining a modest short position at this time.

Our latest estimates for December showed real employee income increased by 0.27%. This data showed a deceleration in the quarterly trend relative to the one-year trend. We show the evolution of the sequential data below:

This estimated real income data came alongside a nominal income change of 0.45%. We can decompose this nominal wage growth into growth from employment, hours worked, real wages, and wage inflation, which contributed 0.16%, 0%,0.1%, and 0.18%, respectively, to nominal income. We show the sequential evolution of this compositional data below:

We further decompose these macroeconomic drivers by industry. Below, we visualize the contributions to total nominal income coming from each industry, broken into its drivers, ranked from left (weakest) to right (strongest). As we can see below, nominal income was generally positive, with Education and Health Services contributing the most to strength and Durable goods dragging on nominal income growth:

For further perspective, we show how nominal employee income has evolved over the last year, with nominal income growth of 5.01%, 2.38% of which came from real growth. Over the last year, nominal income has primarily been driven by Wage Inflation, which has expanded by 2.6%. We display this below:

Digging into the industry-level data, we find that nominal employee income over the last year has largely been positive, with Education and Health Services, Professional and Business Services, and Financial Activities contributing strength (shown in shades of blue). On the other hand, Mining and Logging, Utilities, and Nondurable goods are the weakest areas of income (shown in shades of red).

Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Nominal incomes are rare to contract, given the persistence of wage inflation. As such, they can often be a poor indicator of cyclical conditions. To better understand these dynamics, we turn to real employee income, which over the last year has largely been positive, with Education and Health Services, Professional and Business Services, and Construction contributing strength (shown in shades of blue). On the other hand, Mining and Logging, Nondurable goods, and Utilities are the weakest areas of income (shown in shades of red):

Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth: