Sunday, May 07, 2006

More hours per worker and more money per hour

I view keeping an eye on the economy as a vital part of investing. Picking good stocks is important, but you still need some idea how much of your assets to keep in stock, bonds, or other asset classes. Timing the stock market is difficult if not impossible, but timing bonds and hedging against inflation is a practical skill that every investor should tune up. Economic numbers can indicate softening of the customer market, and can also show us impending inflation. If the customer market softens we have to lower our growth predictions when figuring out what a stock is worth. If inflation looms bond rates should rise and the prices will decline.

To refresh those who may not have been reading for long I have previously expressed concerns about the effect of reduced cash out refinancing on consumer spending, but some calculations based on wage growth numbers suggested that the consumer was going to see enough additional money in his paycheck to keep spending going. I have been predicting wage growth between 3.5% and 4% year over year. The preliminary April numbers are out on the BLS website and the year over year growth rate is a solid 3.8%. The latest monthly number is quite high as these things go (check out the plot on the BLS) and swamps the predicted 1.5% spendable cash drop due to reduced real estate refinancing. The total take home pay of all workers the survey covers works out to around $4 trillion, so a 3.8% increase is about $157 billion.

The average workweek, meanwhile, rose to 33.9 hours from 33.8 hours (which may not seem like a big deal, but since these are broad averages this is the equivalent of almost 300,000 jobs which were filled by working current workers more hours). More hours also puts more money into workers pockets to spend. I calculate the extra 0.1 hours per week, times the workers averaged, times the average wage of $16.61 equals US$199 million dollars a week or almost $10billion per year. If we reduce that a bit under the assumption that the hours increased more for lower paid workers and subtract off a bit for taxes it’s still around $6-8 billion increase in take-home dollars.

Current consumer discretionary spending is about $3trillion, so we’re talking about a contribution of only about 0.25% from added hours but 5.2% for the increased pay, so that is clearly the more important number.

As an aside, some people will notice some oddness in these numbers. For example: how can consumer discretionary spending be $3 trillion if total take home pay of all workers is $4 trillion? But the BLS numbers only measure salary income and our nation is increasingly becoming a nation of people who own assets and/or own their own businesses. Portfolio income doesn’t show up in that $4 trillion, nor does rental income, owning a business, or any other source except traditional salary. The Finance Wonk, for example, makes every last bit of his money from non-salary sources so my income is zero according to the Bureau of Labor Statistics. Don’t worry, I do well from various sources – although I wouldn’t mind if you click on a few of those advertisements you see on this page J

  • Scenario: Pay rises 3.8% year over year and hours worked rises a few tenths of an hour this year
  • Outcome: 5-6% rise in discretionary spending ability from the US consumer
  • Meaning: This would easily support most of the growth projections being used for continued corporate growth.

I think these numbers suggest that the stock market can continue without crashing this year so we can be comfortable with our money in stocks.

These trends also lean toward possible inflation and certainly reinforce the factors that pushed me to recommend hedging against a decline in bond prices. I continue to like RRPIX (which I rate as a BUY and thus own) and RYJUX because I see long term rates climbing into the near future.

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