Morning Report: Real wage growth? Depends on the inflation index you use

Vital Statistics:

Last Change
S&P futures 2890 2.9
Eurostoxx index 375.35 -0.33
Oil (WTI) 68.96 -0.25
10 year government bond yield 2.90%
30 year fixed rate mortgage 4.56%

Stocks are flattish despite the continued rout in emerging markets. Bonds and MBS are down small.

Lots of labor market data this morning.

Initial Jobless Claims fell to 203,000, which is the lowest level since late 1969. That said, job cut announcements did pick up, according to the Challenger and Gray job cut report.

Productivity came in at 2.9% in the second quarter, according to BLS. This was driven by a 5% increase in output and a 2% increase in hours worked. Unit Labor costs fell 1% as compensation increased 1.9% and productivity increased 2.9%. The jump in productivity is important, not only because it generally portends higher wages, but because it portends non-inflationary wage inflation, which will allow the Fed to continue on its slow interest rate hike path.

The economy added 163,000 jobs in August, according to the ADP report. This is below the Street’s 195,000 estimate for tomorrow’s employment situation report. This is the lowest number in a year. Despite the slowdown, Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is hot. Employers are aggressively competing to hold onto their existing workers and to find new ones. Small businesses are struggling the most in this competition, as they increasingly can’t fill open positions.”

The WH says that wages are growing faster than traditional measures would indicate. The Administration is saying that real wage growth is in the 1.4% to 1.9% range. According to BLS, nominal (non-inflation adjusted) wage growth has been around 2.7%, and with the CPI running at 2.9%, that would imply slightly negative wage growth. What is the difference? First of all compensation includes more than simply wages. It also includes benefits and health care costs have been increasing at well above the rate of inflation. This is a valid (albeit unsatisfying) point. Second, a lot depends on which inflation index one uses. The Personal Consumption Expenditure Index is the one preferred by the Fed and it generally runs slower than the CPI. This is due to a number of reasons, but the primary one is that the PCE takes into account the substitution effect and CPI doesn’t. In other words, the CPI assumes that people’s behavior doesn’t change when presented with increased prices, while the PCE assumes that people will consume less high priced goods and consume more low-priced goods. The classic example of this is that when meat prices rise, people eat more vegetables. Another difference is that PCE looks at costs from the business sense more than CPI does. This is important in wages, because the cost of an employee to an employer is more than just the paycheck. CPI generally ignores this, while PCE takes it into account. Punch line is that partisans are going to cherry pick the inflation index they want in order to push their interpretation of events. Left econ wants to push the narrative that wages are going nowhere and the headline CPI number gets them there. Right econ / the Admin will prefer to use PCE, which shows real wage growth.

Left econ is trying to use slow wage growth to push a theory that employers are exhibiting monopsonistic behavior and the remedy is for the government to break up big employers. Monopsonistic behavior implies that there is only one buyer for something (the classic example is the government and defense technology). Left econ thinks the labor market is a lot more concentrated than common sense would suggest. Their conclusion is that the average worker has only 3 companies to choose from which is hard to accept.

Trump administration officials are denying they wrote an anonymous op-ed published in the New York Times that describes cabinet members trying to steer a mercurial executive to do the right things and to blunt his worst impulses. There has been plenty of evidence that has been the case already, especially on trade. Regardless, it just seems to be the latest in the war between Trump and the press, and the markets don’t seem to care.

On the trade front, today is the deadline for public comment on some $200 billion in new tariffs on Chinese goods. Trump is expected to impose these tariffs once the period is over. He also made comments regarding NAFTA and Canada, saying there has been progress on the issue.

20 Responses

  1. Pretty good piece on Nike’s brand strategy:

    & another one:

    “Hence, we are now asked, as consumers, questions of ever greater political specificity: Where does my light beer stand on immigration reform? Should I fly with a domestic carrier that’s in favor of background checks? Does this Whopper support net neutrality?”

    Liked by 1 person

    • The idea of deliberately alienating one demographic in an attempt to capture another still strikes me as a strange marketing strategy. Wouldn’t you rather have both? Surely there are ways to appeal to young urban blacks without at the same time pissing off older suburban whites.


      • Sure, if there’s a strategy that can do that. But in NIke’s case that would presume that sports itself wasn’t already politicized.

        The second article’s contrast between Michael Jordan’s time and now goes to the key point about how much more political things have become in general.

        and older suburban whites usually buy New Balance anyway.

        Edit: Interesting take


      • None of this seems to really capture how vapid the frickin’ tag-line is. “Believe in something. Even if it means sacrificing everything.”

        What is “something”? It can be anything! You could believe in genocide, and no doubt there would be sacrifice as part of that. And what if I believe in a particular TV show or brand of sports apparel . . . is that thing I believe in really worth sacrificing everything?

        It’s an awful campaign. Their choice of spokesmartyr barely scratches the surface.

        I mean, seriously. Believe in love. Believe in justice. Believe in yourself. Not frickin’ “believe in something”.

        I’m not offended by the inclusion of a sportsguy whose trying to make himself into a modern hero for not pledging allegiance (if anything, I’m more offended by the idiots burning their Nike stuff, in part because I think half of them are attention-seeking or trolling rather than sincere), but I’m very offended by the meaningless, awful tag line. If they spend good money on that, then they are clearly charging too much for their fine-but-unexceptional shoes.


    • Amazing how many leftist writers have been deployed to defend Nike.

      FWIW, woke sports has been a flop, from the NFL, which continues to lose viewers, to ESPN, to Sports Illustrated. I do agree with the WaPo guy’s thesis that this was probably meant to call off the leftist dogs who are yelling about working conditions in Asia.

      I can’t remember the article, but one talked about how ESPN’s management was perplexed that guys like Chris Berman always attracted a lot of people in person, but Twitter hated him (too old, too white, not woke). So, as they watched sub numbers drop, they got the brilliant idea that the key to success must be to make the Twitter mob happy, hence the Jemele Hill hiring etc. Of course it didn’t work, and even less people watch now.

      It shouldn’t be a surprise that fat purple haired lesbians and skinny beta boys aren’t a big athletic wear buying contingent, although they dominate Twitter. I suspect this backfires, and I don’t think young kids decide what is hip based on what big corporations tell them should be hip. If anything, teenagers are beginning to mock the self-righteous woke schtick the media loves..Sounds too much like their teachers.


      • I agree on the bubble thinking. When you get people in positions of power, able to steer these big franchises and media companies, that live on Twitter or Instagram, they mistake those environments (and, frankly, their tiny subset of those environments) as the world at large. Add IRL is a bubble for them in LA or NYC, it gives them an insanely distorted view of the populace. I expect they don’t have any idea how much of those who remain watching those shows are either hatewatching or doing so despite their SJW orientation, not because of it.

        I don’t think we’ve seen the bottom of Woke Sports being a flop, though. These things are often additive. Established markets and franchises can take a lot of abuse, and the brand-loyal can take a lot of abuse, before they finally say: I’m out. I think ESPN/ABC and others can mistake the endurance of abuse as “liking” it.

        I don’t think young kids decide what is hip based on what big corporations tell them should be hip

        I think social media has exacerbated the organic nature of what becomes hip amongst the youth. It’s become it’s own thing, and what goes viral and how and what becomes the cool orientation about whatever it is is entirely uncontrollable by the mega-corps, or anybody. It may look like there is control with one of tens-of-thousands pre-meditated viral campaigns actually takes off, but it’s not.

        teenagers are beginning to mock the self-righteous woke schtick the media loves

        Yeah, because the people doing it are old farts. The millenials and younger that don’t like Trump or the GOP don’t give a shit about collusion and most of the things the older left is upset about, and more don’t like him because he comes off as kind of an ass and an Old Entitled White Guy, and because he’s an avatar, for them, of The Man on issues like marijuana and their vague notions of what the future utopia should look like.

        It’s not because he doesn’t have a comprehensive trans policy, or his position on tariffs, or a million other things. Not that it matters because those people don’t vote in large numbers, either way.


      • “Amazing how many leftist writers have been deployed to defend Nike.”

        This seems to be the case with everything. Not as many (but too many) were deployed to talk-up the boring (but visually beautiful) A Wrinkle In Oprah before the first few weeks of box-office proved it was a lost cause.

        The Last Jedi has had almost every lefty writer in entertainment deployed to defend and praise and characterize critics or those who just didn’t like the awfully written, terribly plotted, worst-Star-Wars-movie-ever as racists and women-haters.

        If I had time, I could probably think of more examples. This seems to be part of the new landscape and the greater politicization of everything. Anything that could potentially be an avatar of Wokeness must be defended (or, in some cases attacked) with all the weapons available.

        The argument over the now-woke Hugo awards involved a crazy war, with factions and dozens of sci-fi commentators weighing in and magazines like Wired stepping in to praise Caesar. What should have been a case of one guy harassing his ex-girlfriend (for which he should have gotten in big trouble for) became a war between the woke and the red-pilled called GamerGate.

        It’s just SOP now.


Be kind, show respect, and all will be right with the world.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: