A robust economy will lead to wage inflation as our industry competes for workers, and that will fuel inflation, which fuels interest rate increases, which fuels economic slowdowns.
A few columns ago, I wrote about the current labor shortages that all our clients are suffering, not to mention American industry as a whole. I worried about the impact it will surely have on wage growth, the single biggest contributor to inflation given the outsized impact wages have on our economy. Remember, as I have said many times before in this column, the consumer represents 70% of America’s GDP, and when you consider that the vast majority of incomes are spent rather than saved, even slight upward movements in wages has a profoundly positive impact on GDP.
Well, news from the popular business press in the last couple of days reports that recent American incomes rose and poverty in America declined for the third consecutive year in 2017, according to census figures released last week. That means more Americans are benefiting from the robust economy as I have suggested in the past.
The new data, which provide a broad look at U.S. economic well-being, show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. I should add that my father, in the 1960s when I was a boy, would have killed to have that kind of household income. My mother, like the spouses in the television shows such as Father Knows Best, The Dick Van Dyke Show, and other prime time comedies that reflected post-war American life, was a stay-at-home mother in a single earner household. The two-person wage earning household has pushed American incomes up to a level that is the envy of the world.
Poverty is still a challenge in the richest nation in the world, though, as there were 39.7 million people in poverty last year, but that rate dropped a 0.4 percentage point to its lowest level since 2006. And further, employment growth continued its robust pace: the number of people working full time, year-around increased by 2.4 million in 2017.
The good news is that wage pressure seems to have moderated coming out of the recession. The 2017 growth rate lagged behind the previous two years, when median household income, the midpoint of all households, rose 3.2% in 2016 and 5.2% in 2015. This moderating growth lessens the impact of inflationary pressure. And when we drill down into the data, incomes rose mostly because more people worked more hours, and to a lesser extent because their wages increased. The Census Bureau noted that it is continuing to see a shift from part-time, part-year work to year-round, full-time work.
Some economists said they remain puzzled that wages haven’t risen more quickly, given the overall strength of the economy and an unemployment rate at less than 4%. While wages are rising a little bit more quickly than earlier in the economic expansion, inflation has also ticked upward, cutting into gains.
Incomes have grown 10.4% in the past three years, and last year’s figure was the highest on record; but a change in the way the numbers are calculated over time makes comparisons imperfect, and census officials said last year’s figure wasn’t statistically different than income peaks in 1999 and 2007.
The Census Bureau report also reflected that in the larger metropolitan markets, median household income also rose in 22 of the 25 largest metros, and stayed roughly the same in the other three. And in medium-size markets, gains topping 5% occurred in places ranging from Baton Rouge, Akron, Tucson, Chattanooga, San Diego, Richmond, and Scranton-Wilkes Barre. Large cities continued recent trends by recording the strongest income gains, with median household income rising 3.1%. Gains were weaker in their suburbs and smaller cities, at 1.6%, and rural households gained 2%.
In summary, I continue to fret that a robust economy will lead to wage inflation as our industry competes for workers, and that will fuel inflation, which fuels interest rate increases, which fuels economic slowdowns. But for now, the pressures are muted. I promised I will be among the first to predict the downturn when the next one approaches; right now, it isn’t even on anyone’s radar.
About the Author
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.