Last week’s consumer news. What it means for your investment assets.
What do you remember about last week’s news? Certainly you remember Roseanne and Samantha. Those ladies have to get together. Possibly you recall the beginning of the NBA Finals. I miss you Boston Celtics, very badly. Then there’s the economy nerds like me who hit the trifecta last week:
- Wednesday May 30, the Q1 GDP report.
- Thursday May 31, the April personal spending and income data.
- Friday June 1, the May jobs report.
Yes, Roseanne and Samantha were a lot more entertaining, but the nerd trifecta was more important for your investment portfolio.
In this post I use the trifecta data to get insights into two crucial investment return drivers – inflation and consumer spending. The inflation rate drives returns on cash (CD’s, etc.), bonds and stocks, while consumer spending is critical to business earnings. So let’s get going before it’s too late.
I start with the Department of Labor’s jobs report. The DOL estimated that US jobs grew by 223,000 in May, continuing a multi-year trend of solid growth, as this chart shows:
Sources: Jobs – Department of Labor. Population – Bureau of Economic Analysis
The chart shows that the US is now in its 8th year of growing far faster than the growth in the working age population. In fact, the 18.6 million jobs added since the beginning of 2010 far exceeded the 8 million growth in 18-65 year olds, and was nearly as large as the 19.1 million total population growth over that period. In other words, job demand substantially exceeded labor supply since 2009. As a result, the DOL said that the unemployment rate hit a near-record low of 3.8%.
Faster growth in demand than supply is supposed to increase price, in this case the price of labor. The Bureau of Economic Analysis’ (BEA) personal spending and income report provides insight into labor pay rates. I divided its wages and benefits data by the jobs data to get this chart of pay per worker:
Sources: Jobs – Department of Labor. Wages and benefits – Bureau of Economic Analysis
Logic suggests that wage growth should have gradually accelerated over the past 7 years as the excess supply of data was whittled down. The chart says that’s not the case; wage growth per job has been quite volatile, and the most recent reading is no more than average. Huh?
I am certain that the bulk of the explanation for the chart’s volatility is simply less-than-ideal data. It’s impossible to get precise monthly wage and job data across our vast economy; even Google couldn’t do it. Volatility in the reported numbers should therefore be expected. But anecdotes suggest seem to support the common sense that wage growth is accelerating, and should do so for the near future:
“Ohio landscapers say low unemployment rates, a cap on seasonal immigrant workers and drug use is causing a shortage of workers. Sandy Munley is executive director of the Ohio Landscape Association. She says that difficulty getting seasonal workers ‘is a huge, huge issue this year.’” (Associated Press)
“America has a massive shortage of truck drivers. Joyce Brenny, head of Brenny Transportation in Minnesota, increased driver pay 15% this year to try to attract more drivers. Many of her drivers now earn $80,000, she says, yet she still can't find enough people for the job.” (Washington Post)
Last week’s job and income data therefore reiterates my concern about rising inflation. The last CPI reading (April) indicated that inflation rose by 2.4% YoY. The 10-year Treasury is currently yielding 2.9%, a slim 0.5% above the inflation rate. Historically that spread averaged about 2.5%, or a 5% 10-year Treasury yield. To adjust to a 5% market yield, the Treasury bond price would have to decline by 16%. To me, then, the risk to bond prices is heavily to the downside. Don’t buy bonds. Consider selling some bonds. Especially you, Roseanne and Samantha.
The following table tracks annual changes in personal spending and income over the past four years (2018 through April, then annualized):
Source: Bureau of Economic Analysis (BEA)
The table has a number of points of interest to my econo-nerdness (I also have a macho side that was recently discovered using nanotechnology). The first point is the top line – household spending growth was flat over the past two years. That is despite the strong job growth I identified above. And it is despite healthy growth in household income over the past two years, particularly this year. As a result, GDP was a disappointing 2.2% for 2018’s Q1. What’s going on? Clues to 2018’s mediocre consumer spending growth can be identified in the details of the personal income table above:
The traditional sources of consumer spending growth have been disappointing. Note that growth in wages/benefits and small business and investment income are actually lower this year than last year. Small businesses in particular have weakened as an income source.
The government has been a big help… Note that government growth in retirement income – Social Security and Medicare – picked up by $115 billion this year, versus $50 billion last year. The long-term trend here is the wave of retiring Baby Boomers. Time to start paying Grandpop and Grandma’s rent, Millennials and Gen Xers. The other is the tax cut. Increased income taxes due to rising wages should have cost households about $125 billion this year. Instead they added $147 billion. Cool – more government spending and less government revenue. All great civilizations have borrowed their way to prosperity.
…But households so far have banked the tax savings. People adjust their spending by adjusting their borrowing and their savings. The table above shows that borrowing behavior has been stable this year so far. But savings surged. It seems pretty clear that the tax cut so far has been banked. An important question for businesses, then, is whether households will continue to forward their tax cuts to Citibank and Merrill Lynch, or whether they will ramp up their spending.
I bet on the latter. I bet on an increase in “Alexa, buy me some more useless junk.” Or “Siri, buy me an Alexa.” Or “Toyota, supersize that SUV.” If so, that is another argument for higher inflation and another risk for bonds. As well as an argument for continued healthy corporate profits. Buy some stocks with those bond proceeds.