Feb 10, 2020

Axios Markets

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1 big thing: Historically weak wage growth may be the best we get

Illustration: Aïda Amer/Axios

The U.S. economy added 225,000 new jobs last month and more workers came into the labor force. But data showed wages again failed to rise meaningfully, and there's reason to worry that its growth may have peaked at this relatively low level.

What's happening: Average hourly earnings grew by 3.1% over the last 12 months, according to the January jobs report, and have stayed within the narrow range of 2.9% to 3.2% for much of the past year and a half.

By the numbers: The BLS employment cost index rose just 0.7% in the fourth quarter, with the increase in wages and benefits slowing to 2.7%, down from 2.9% in 2018. Other measures of pay and benefits also signal that the wage growth is plateauing or going in reverse.

  • The pace of wage and benefit increases also slowed last year from 2018's pace.
  • Wages and salaries have risen 2.9% in the past 12 months, down from 3.1% in 2018.
  • The latest reading of personal consumption expenditures, the Fed's preferred metric for inflation, showed just a 1.6% increase.

Why it matters: "Over the last 40 years, wage growth for typical American workers has been extraordinarily weak," researchers from the Brookings Institution noted in a recent paper.

  • Their data shows many Americans have not seen a significant raise in that time, with hourly wages at the middle of the income distribution having grown only 12% between 1979 and 2018 when adjusted for inflation.
  • Economic growth has slowed since 2018 and is expected to continue to do so, with the Congressional Budget Office predicting an average of 1.7% annual growth over the next 10 years.
  • When GDP growth slows, wages generally slow as well.

What's next: Policymakers have begun to refocus their attention on wage growth, but few concrete proposals have surfaced for how to achieve that goal.

  • Many Democrats, including presidential hopeful Bernie Sanders, have proposed raising the national minimum wage to $15 an hour, but research from Ernie Tedeschi, an economist and head of fiscal analysis at Evercore ISI, found that minimum wage increases only added "0.4 percentage points of upward pressure" to wage growth.
  • That's because a relatively small percentage of U.S. workers earn the minimum wage.
2. Catch up quick

The global death toll from the coronavirus outbreak reached 910, with 3,062 cases identified Sunday, as the head of the World Health Organization voiced concern over the spread of the disease from people with no travel history to China. (Bloomberg)

Chinese authorities denied a report from Nikkei that they had blocked Apple supplier Foxconn from restarting work at plants in China because of a "high risk of coronavirus infection" at the facilities. (Reuters)

L Brands is closing in on a deal to sell Victoria’s Secret to private equity firm Sycamore Partners that could be announced next week. (CNBC)

3. Trump's budget proposal relies on highly unlikely expectations
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Reproduced from WSJ.com; Chart: Axios Visuals

President Trump is expected to double down on big spending and tax cuts when he releases his budget proposal for fiscal year 2021 later today.

The big picture: The budget proposes increases in defense spending and other categories and also assumes the annual budget deficit will fall from more than $1 trillion in 2020 to around $200 billion, largely as a result of increased U.S. growth.

  • The budget projects 3% growth every year for the next 15 years, even though annual GDP has not grown by that amount during Trump's presidency and last hit that growth rate 15 years ago.
  • The growth projection is about double the CBO's expectation for growth during that time period.

Between the lines: Trump's budget also proposes to cut spending by $4.4 trillion over the next 10 years. Of that, it targets $2 trillion from mandatory spending programs, which would require action from Congress.

  • Trump proposes to cut EPA spending by 26%, the Department of Housing and Urban Development’s budget by 15%, the Commerce Department by 37%, foreign aid by 21%, and the CDC by 9%.

Reality check: Presidential budget proposals rarely, if ever, reflect actual spending. However, the proposal does provide insight into the Trump administration's policy priorities.

What they're saying: Vice President Mike Pence suggested in a Friday interview with CNBC that the debt and deficits are not a primary focus of the administration.

  • "The president came in and said first and foremost we have to restore growth," he said. "That's how we'll deal with the long-term fiscal challenges facing our country."
4. Railroad report shows freight decline continues
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Data: Association of American Railroads; Table: Axios Visuals

North American rail traffic continued to decline in January, with U.S. rail carloads dropping by 5.9%, or 73,110 carloads, year over year, according to the latest report from the Association of American Railroads (AAR).

  • It was the 12th straight month of decline, and both major rail shipments — coal (down 13.8%) and grain (down 11.6%) — had what AAR termed "lousy Januarys," accounting for a decline of 68,790 carloads for the month.

Why it matters: The report suggests that improved sentiment from the U.S.-China phase one trade deal and apparent Brexit resolution has yet to make its way to the bottom line. Railroads continue to see declining numbers despite the pickup in global manufacturing reports.

Yes, but: Excluding coal and grain, U.S. carloads were down just 0.6% in January, which was the smallest decline in a year.

5. Mortgage rates hit 3-year low

The average rates for 15- and 30-year fixed mortgage fell for the third straight week last week, touching their lowest levels in three years, per new data from mortgage giant Freddie Mac.

  • The average interest rate on a 30-year fixed mortgage was 3.45% as of Feb. 6, the data shows, down from 4.45% a year ago.

Why it matters: Lower interest rates tend to increase housing prices and reduce housing supply, both of which are already issues for the broader market, as I wrote on Friday.

  • “Price appreciation has rapidly accelerated, and areas that are relatively unaffordable or declining in affordability are starting to experience slower job growth,” Lawrence Yun, NAR’s chief economist, said in a statement last month.
  • “The hope is for price appreciation to slow in line with wage growth, which is about 3%.”

Sir William Arthur Lewis was an economist who created the "dual-sector model" detailing how growth differed in rich and poor economies. His theory became the backbone of international development economics.

  • He was the first black student ever to gain entry to the London School of Economics and became the first economic adviser to the newly independent nation of Ghana, helping to draw up its first-ever five-year development plan in consultation with President Kwame Nkrumah.
  • Lewis, a dual citizen of Saint Lucia and Britain, was knighted in 1963 and won the Nobel Prize in economics in 1979.