Economic Perspectives

Steve Scranton

SVP, Chief Investment Officer and Economist

Perspectives

After a two-week rest for your eyes, I am going to hit you with another graph-heavy newsletter. If I consolidated the graphs, I don't think you would find any value in them since they would just be a compressed jumble of lines. So, warm up whatever finger you use to scroll down your screen!

Today's Perspective section is going to take a closer look at wages since wages are the fuel for spending (or paying off debt) for the average worker. The first update to 3rd quarter Gross Domestic Product (GDP) shows an economy that was growing faster than originally reported. What did not get as much press was the fact that consumer spending data was revised down from a 4.0% growth rate to a 3.6% rate. Make no mistake, that is still a strong number but, this breaks a pattern that has existed since the end of the pandemic recession. Since then, 1st, 2nd and 3rd quarter consumer spending data has been revised up from the preliminary estimate each year. The 4th quarter of each year was when a downward revision occurred. Whether the downward revision in this year's 3rd quarter has any meaning remains to be seen. What I am examining today is whether wages played a factor in the slow down.

The data comes from the Bureau of Labor Statistics and is as of 10/31/23. Since I am looking for any signs of a change in trends, I am limiting my examination to the last two years (10/31/21-10/31/23).

 When the employment report comes out each month, what is usually reported in the media (and the Bureau of Labor Statistics) is what happened with average hourly earnings. As you can see from the graph below, average hourly earnings have been steadily rising since October 2021. This would appear to help explain why the consumer continues to spend. You can see from the graph that the size of the wage increase has recently slowed but, it is still growing.

What gets missed in the headline reporting is the fact that not all workers work a full 40-hour week. In fact, as of 10/31/23 the average worker worked 34.3 hours. As a result, the average workers' weekly paycheck may not increase as much as their average hourly rate would imply. As you can see from the graph below, businesses have been reducing hours for workers. The average hours worked has fallen from 34.8 hours in November and December of 2021 to 34.3 hours as of 10/31/23.

The result is that average weekly earnings have not risen as steadily as average hourly earnings. As you can see from the graph, even though average hourly earnings rose in October, average weekly earnings fell. That is not a situation that the average worker wants to see.

Those three graphs give us a picture for the average for the US as a whole but, that does not help us understand if there are differences among industries. What is happening at the industry sector level? The rest of the graphs provide the same information (average hourly earnings, average hours and average weekly earnings) at the industry level. As I explained at the beginning, to keep the graphs readable, I have broken them into approximate quartiles. As you will see as I go through the graphs, the members of each quartile change depending on what data we are examining.

The Utilities sector has the highest average hourly earnings and as you can see from the graph the strongest growth trend. There was a $4.73/hr differential between Utilities and Financial Activities as of 10/31/21. That differential is now $5.98. For those old enough remember the song, the Wichita lineman is doing very well if you simply look at average hourly earnings.

The average worker in the top three industry sectors for hours worked log more than 40 hours per week. The Mining & Logging industry is the top industry for hours worked.

Even though Utilities were not in the top quartile for hours worked, the higher average hourly wage was still enough to make it the top industry for average weekly earnings.  Even though Mining & Logging had the top hours worked, the decline in average hourly earnings resulted in average weekly earnings declining. Note: the average weekly earnings number includes overtime for the three industries that show more than 40 hours worked.

Two out of the four 2nd quartile industries showed declines in average hourly earnings-Mining & Logging and Wholesale Trade.

Three out of four 2nd quartile industries have experienced declines in average hours worked since August. Construction has had stable hours worked since August.

Three of the four 2nd quartile industries experienced a decline in average weekly earnings in October. Only construction saw an increase. The Professional & Business Services industry displaced Transportation & Warehouse for membership in the 2nd quartile when examining average weekly earnings compared to average hourly earnings.

All three 3rd quartile industries experienced an increase in average hourly earnings. The gap between the top sector in the 3rd quartile (Private Education and Health Services) and the bottom sector (Other Services) has widened from $2.62/hr to $2.94/hr.

Professional & Business Services and Private Education & Health Services have experienced declines in hours worked recently, Information saw a decline at the beginning of 2023 but, hours are now increasing gradually. Private Education & Health Services have seen hours decline since August while the decline for the Professional & Business Services sector is only one month.

Although not abundantly clear from the graph, all three 3rd quartile industry sectors saw an increase in average weekly earnings from September to October. Once again, you can see that the members of the 3rd quartile changed when comparing average hourly earnings and average weekly earnings. The Other Services sector was in the 3rd quartile when looking at average hourly earnings but, once the hours worked are factored in, Transportation & Warehouse replaced Other Services.

Transportation & Warehousing is in the bottom quartile when strictly looking at average hourly earnings. Because Transportation & Warehousing was in the 2nd quartile for hours worked, it climbed into the 3rd quartile when examining average weekly earnings. Transportation & Warehousing also had the strongest growth. Both Retail Trade and Leisure & Hospitality experienced a decline in average hourly earnings in October.

The average worker in the Leisure & Hospitality industry works far fewer hours than the other industries in the bottom quartile.  This may be misleading since it has been my experience that most of the Leisure & Hospitality industry is still suffering from staff shortages. I suspect that the reduced hours are by choice from the worker. I admit that I speak from a biased view since I paid my way through college by working in the Leisure & Hospitality industry. I worked part-time by choice because I had college classes to attend and homework to complete. 

The disheartening story for the average worker in the Leisure & Hospitality industry is the fact that the industry has the lowest average hourly earnings and the least number of hours worked. That may be a misleading story depending on your job in the Leisure & Hospitality industry. Some of the jobs in that industry receive tips and, not all tips are captured in the Bureau of Labor Statistics data.

Closing Thoughts

• The data on wages highlights the need to go “below the surface” of the headline reports to gain a clearer understanding of the economic data.
  • Although the headline data shows average hourly earnings continuing to rise, the steady reduction in hours worked has resulted in average weekly earnings declining in October compared to September. That may help explain the downward revision to consumer spending since the October data was not available when the first estimate of consumer spending was calculated.
  • We will need to monitor to see if this was a one-time event or if a trend is starting. Any continued decline in take-home pay for the average worker risks triggering reduced spending.
• Since the average worker does not have accumulated wealth or excess income to have an investment portfolio or own rental property, the average weekly earnings are their primary fuel for spending.
  • They are not benefiting from the rise in interest rates that is now resulting in higher interest payments on investments.
  • They are not benefiting from higher rental payments due to the ongoing housing shortage.
• What may be happening is job hoarding.
  • Businesses may be seeing sales slow but are not sure if the economy is slowing or heading for a recession.
  • Many businesses fear that if they lay off someone and then the economy improves, they may struggle to fill the needed position.
  • Rather than laying the person off, businesses may be cutting everyone's hours to achieve the same cost savings without losing the employee.
  • If the economy avoids recession and sales increase, they simply increase the hours of their employees rather than trying to fill an open position.
• Businesses may still carry the “scars” of trying to find help after the end of the pandemic recession and may have changed their business model. 
  • The previous model may have been to cut staff when sale fell.
  • The new model may be to cut hours before cutting staff.
• If this is true, it may explain why initial jobless claims have not risen as most econometric models forecasted and it may also help explain why the unemployment rate has remained near historically low levels.

Economic Data

Construction

• Construction spending continues to grow as the fiscal initiatives related to chip manufacturing and green energy have provided the fuel for the increased spending. Infrastructure spending is also helping total construction spending maintain a positive pace. Construction spending rose 0.6% in October after rising 0.4% in September.

Consumer Confidence

• The Conference Board's Consumer Confidence index rose in November. This was solely due to the fact that it revised the October result from a 102.6 level to a 99.1 level.
  • The Present Situation sub-index fell from 138.6 to 138.2. Once again, the Conference Board made a major downward revision to October's level. The revision took the October level down to 138.6 from the originally reported 143.1 level.
  • The Future Expectations sub-index rose from a 72.7 level in October to a 77.8 level. The October level for this sub-index was also revised lower. The revision took the level from an originally reported level of 75.6 to a 72.7 level.

Economic Growth (GDP)

• The Bureau of Economic Analysis (BEA) provided it first revision to 3rd quarter GDP growth. It revised it preliminary estimate of 4.9% annualized growth and is now estimating growth was 5.2%. Consumer spending was revised lower, but business and government spending were revised higher. The BEA will make one last revision next month.

Employment

• The Department of Labor reported a 7,000 increase in filing for initial unemployment benefits. Total jobless claims now stand at 218,000. Continuing claims continue to rise in a sign that once someone becomes unemployed, it is now getting harder to find a new job. Continuing claims rose from 1,841,000 to 1,927,000.

Housing

• After experiencing an uptick in sales in September, new home sales dropped again in October. New home sales fell 5.6% following an 8.6% increase in September.
• The FHFA reported a 0.60% increase in house prices in September despite the high rate environment. A lack of supply of houses has helped keep prices increasing.
• S&P Core Logic's house price data painted the same picture. Prices rose 0.67% in September.
• The Census Bureau reported a 1.5% decrease in pending home sales in October as rising mortgage rates have impacted demand.
• The Mortgage Bankers Association reported a small increase in mortgage applications last week. Applications rose 0.3% after rising 3.0% the week before.

Inflation

• The BEA provided their first revision to its inflation indices. The GDP price index was revised slightly higher. The index rose 3.6% on an annualized basis in the 3rd quarter after being reported as a 3.5% increase in their first estimate. Its PCE Price index was revised from a 3.4% annualized rate in its first estimate to 3.0% rate. The Core PCE Price index was revised down from a 3.7% annualized rate to a 3.5% rate.

Inventories

• After increasing inventories by 0.1% in September, wholesalers reduced inventories by 0.2% in October. Retailers left their inventories unchanged after increasing them 0.4% in September.

Manufacturing

• Manufacturing activity continues to deteriorate in the Dallas Federal Reserve region. Its manufacturing activity index fell from a negative 19.2 level to a negative 19.9 level.
• Conditions worsened in the Richmond Federal Reserve region as well. Its regional manufacturing index fell from a positive 3 level to a negative 5 level.
• S&P Global reported no change to its US Manufacturing PMI index. The November results for the index were the same as October: 49.4. The index remains in contractionary territory.
• The Institute for Supply Management (ISM) reported the same results for its manufacturing index. The index was unchanged at a 46.7 level. This index also remains in contractionary territory.
• The Chicago Federal Reserve reported solid improvement in its manufacturing index. The index rose from a 44.0 level in October to a 55.8 level in November.

Personal Income

• Personal income growth slowed in October compared to September. Personal income grew 0.2% after rising 0.4% in September.

Personal Spending

• The pace of growth in spending slowed more than the growth in income. Personal spending rose 0.2% in October after rising 0.7% in September. Will the holiday buying season be the last hurrah for consumers? Only time will tell.

Service Sector

• The Dallas Federal Reserve reported improvement in its regional service sector activity index, but the index remains negative. The index improved from a negative 18.2 level in October to a negative 11.6 level in November.