Tomorrow, we may get the latest evidence that the jobs market
continues to slowly improve when the Labor Department
releases its weekly jobless claims report
. Yet despite an improving labor market, household spending isn't
picking up enough to fuel a faster recovery.
Why? As I write in my new
, the big missing ingredient is a lack of real income growth. In
other words, an improving jobs market isn't translating into
higher wages for the vast majority of the population, meaning
very few can get a raise.
Now, how bad is it? Well, if you look over the last 50 or 60
years, household income typically has risen by about 3.5%
annually after inflation, fueling a 3.5% or so gain in
consumption. However, since the recession ended three years ago,
we've seen household income gains roughly half of that. And this
year, things are even worse. For 2013, real, or
inflation-adjusted, household income growth is averaging only
There are short- and long-term factors to blame.
In the short term, one major factor behind the muted wage growth
is ongoing political and fiscal uncertainty in Washington. Even
though fewer companies are laying employees off now than during
the last recession, the pace of hiring isn't as great as it would
have been if there was more stability in Washington. And if
hiring doesn't increase at a faster rate, then there's no upward
pressure on wages.
Advancing technology is also creating downward pressure on wages,
eliminating many middle-income jobs. At the same time, there is
the global wage arbitrage, i.e. the fact that many jobs are still
going overseas, putting downward pressure on U.S. wages and
upward pressure on wages in other countries such as China (though
some manufacturing jobs may actually come back to the United
States because of
the U.S. energy renaissance
). Finally, as
the labor force participation rate
has dropped -- in other words, as fewer people are in the
workforce -- overall U.S. disposable income growth at the
aggregate level has been slowing.
So what does this mean for investors? I expect that income
growth will get a bit better in 2014 as the labor market
continues to improve and cyclical headwinds start to lesson.
However, to the extent that the long-term forces I mention above
remain in place, I expect to see slower income growth going
forward over the long term.
This, in turn, probably means slower U.S. consumption and a
somewhat slower U.S. economy (the somewhat because the U.S.
energy renaissance will likely continue, with manufacturing
becoming a larger part of the U.S. economy over time). As such,
I continue to advocate remaining cautious of
sectors dependent on middle-class consumption
and I continue to like more manufacturing-focused sectors of the
market such as energy and
Russ Koesterich, CFA,
is the Chief Investment Strategist for BlackRock and
iShares Chief Global Investment Strategist. He is
a regular contributor to
and you can find more of his posts
Source: December Market Perspectives