At the end of last year, I highlighted 5 graphs to watch in 2015. Now that we have all of the reports for the first three months, let’s take another look.
#5. Mortgage refinancing
After a mini surge at the end of January (light brown in the graph below), refinancing applications fell back to somnolence during February due to a rise in mortgage rates. Refinancing recovered a little in March as rates retreated, but not so low as in January. Mortgage News Daily has the graph:
Over the last 35 years, refinancing debt at lower rates has been an important middle/working class strategy. There is little room left for that strategy. If mortgage refinancing stays turned off too long, and wages don’t grow in real terms, then consumer spending falters and so does the economy.
#4. Gas prices
Here is a graph of gas prices (blue) compared with nominal average hourly wages (red) since the bottom in prices in 1999:
How long must a worker labor in order to buy a gallon of gas? After skyrocketing in the lead-up to the Great Recession, gas prices collapsed, helping the consumer start to spend again on other things at the bottom of that recession. The recent collapse in gas prices took us almost all the way back to that bottom. Just as in 1986 and 2006, at first consumers saved the money, but once they loosen their purse strings this will be a strong tailwind to the economy.
#3. Part time employment for economic reasons
Next is a graph of part time workers for economic reasons expressed as a percentage of the labor force. In the first quarter, this continued to improve:
In the longer view, however, this only brought us to the equivalent of levels in 1988, and still 2% (about 3 million) above the boom level of 1999 and about 1.5% (2.25 million) above the level of 2007.
#2. Not in Labor force but want a job now:
This moved generally sideways during the first quarter, going down by only -56,000 from 6.445 million in December. It is now almost 700,000 above its post-recession low of November 2013 (just prior to Congress’ cutoff of extended unemployment benefits) and more than 2 million above its 1999 and 2007 lows.
#1. Nominal wage growth
After an anomalous decline in average hourly wages in December, and a big positive reversal in January, wages for non-supervisory workers were totally flat in February, and then increased again in March.
After increasing in 2013 and the first half of 2014, in the last 7 months nominal wage growth YoY declined back to its post-recession low. Needless to say, this decline is troubling.
Compare our present expansion with the previous three. In the 1980s and 2000s, by the time we improved to 5.5% unemployment, nominal wage growth was approaching 3% YoY. In the 1990s expansion, at worst, wage growth was on the cusp of acceleration, but was nevertheless 3.5%. Unless wage growth starts to accelerate now, the pattern is not holding.
There have been a few interesting notes about the lack of wage growth. The staff of the Federal Reserve has done a study indicating that the number of long-term unemployed plays an important role (since presumably these people are more desperate). In a similar vein, the Atlanta Fed has reported that the relatively high number of underemployed, and in particular employees who work part time for economic reasons, and also the high number of those out of the labor force, but who would return to work if conditions were better (see items number 2 and 3 above), are an important factor in holding down wage growth. It has also been suggested that the disproportionate (compared to normal times) percentage of relatively highly paid employees (Boomers) retiring from the labor force, and being replaced by younger workers, is holding down wages.
In summary, three months of data into the year shows two series positive (gas prices, involuntary part time employment), little improvement in two others (refinancing, discouraged dropouts from the labor force), and an actual worsening of one (nominal wage growth). Should wage growth not improve, and mortgage refinancing remain dormant, we are going to run into trouble, and I will be looking for other long leading indicators to start rolling over, perhaps in the latter part of this year.
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