As expected, GDP was up nearly 5% in Q1 2006 — the 4.8% rise comes on top of the "tepid" 1.7% gain in Q4.
Once again, many people wrongly reach concIusions from a single data point: With the aftermath of Katrina and Rita disruptions, the loss of shipping down the Mississippi, and the shutting down of refineries and off-shore platforms, the hurricanes and loss of New Orleans was the specific cause of the 2005 Q4 number.
Similarly, the pushing forward of production and consumption from Q4 into Q1 explains the big pop in Q1. If you want to know what GDP is actually, use some common sense and average the 2 quarters: GDP is growing about 3.25%. Same for durable goods: It spiked at a 20.6% pace in Q1 versus plummetting at a 16.6% rate in Q4 ’05.
You should not need a Ph.D in Applied Mathematics to figure out what happened.
In a apparent surprise to economists — but no surprise to readers of this blog — wages were flat. As previously noted, there is inflation in everything but wages.
The WSJ noted:
"Despite the robust economic growth, a separate Labor Department report showed that compensation costs for employers rose only 0.6% in the first quarter — the slowest quarterly gain in nearly seven years — following a 0.8% gain in the fourth quarter.
Wages and salary growth was unchanged at 0.7% in the first quarter, and only 2.7% higher than a year ago. That came as a surprise to many economists as prevailing conditions suggest workers are in a better position to bargain for higher pay."
It was a surprise only to those model driven economists who do not have a way to validate their abstractions in the real world. Indeed, unless your skillset is very specific and highly quantifiable, your wage were flat. In Real terms, i.e., adjusted for CPI inflation — they were slightly negative.
For the reality-based dwellers of the real world, put aside the CPI measured inflation fiction and consider actual cost of living increases: your purchasing power was down between 5 – 10%.
Ouch.
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Source:
Economy Leaps, but Wages Stagnate
GDP Increases by 4.8% In Biggest Rise Since 2003; Growth in Salaries Is Flat
CHRISTOPHER CONKEY
WSJ, April 29, 2006; Page A3
http://online.wsj.com/article/SB114622713718138689.html
More reason to pause and look at some FUTURE data.
It is an overstatement to say that, “there is inflation in everything but wages”. It would be more accurate to say that consumer inflation fears are overblown because there is no wage growth. Liquidity is not reaching consumers because of current fiscal policy and globalization. Because all the excess liquidity is staying in the hands of investors we are experiencing asset inflation and producer price inflation. But ‘cost-push inflation’ on a macro scale is a myth because consumers must have money to buy at higher prices and the credit push is running at its peak (hopefully).
We will see corporate profits erode as they try and fail to push prices higher and then we will see a decline in output. At that point we will be dealing with deflation as consumers scramble for cash. It is 1928, not 1973 (1973 real wage growth was 2.02%). Of course, as I read here recently, this could happen over 6 months or 6 years.
But liquidity is reaching consumers via the housing atm. It’s just not showing up in wages and, with globalization, apparently won’t show up in wages anytime soon.
The more the Fed speaks on inflation, the more I realize that they ONLY consider rising wages to be actual inflation. And I guess I can see their point, as everything else will take care of itself via supply and demand adjustments.
Liquidity hasn’t reached the consumers? WTF? Do you live on the same planet as me?
I don’t know if I live on the same planet as you, but I do know that I live on the same planet as the bond market. And the same planet of a thread discussing real wage declines.
i would also point out that one big factor in driving down wages is the transfer of our economic base from manufacturing to services. services are a cheap commodity these days and can be outsourced to India or a computer for nothing. think about how many real estate agents, bankers, insurance agents, stock brokers, etc… are out there right now.
our economy is a big check kiting operation supported by our ability to sell debt to foreign central banks. the currency is vital to that regime and Bernanke will need to defend it….
the only problem is that wages won’t go back up until we get back to producing things instead of servicing the transfer of money. that will require a much weaker dollar.
thecynic,
In the manufacturing boom of the 1920s manufacturing labor was considered a cheap commodity and undeserving of superior wages. It was that way until labor flexed its muscle and negotiated higher wages.
Your examples aside, most service sector jobs are locked into the US because that is where the consumers are. Additionally manufacturing jobs are easily shipped overseas. Ultimately, there is nothing inherently low-wage about service sector jobs. Labor can do for service sector jobs what they did for manufacturing jobs in the 1950s.
i don’t think we are talking about superior wages, just wages that can keep up with economic growth. that’s not too much to ask but it ain’t happening. and i’m not sure we will see the international brotherhood of mortgage brokers unite or that it would do any good if they did.
much of those wages are on commissions and fees, both of which have been getting squeezed as competition for those dollars saturated the market. it’s likely to get worse as the economy slows back to trend.
In 1913 Henry Ford started producing Model T cars on the first moving assembly line making his workers substantially more productive.
In 1914 he roughly doubled his workers pay to $5 a day.
Both his manufacturing techniques and pay policies were adopted across other industries…
…in the twenties.
Sorry, DJ.
Max, Good job on providing references for your claims – or not. Ford was an anomaly. 1919 – 1929 average annual labor productivity was 5.44% (Table 3). 1920 – 1929 real growth in average annual weekly earnings for unskilled males in manufacturing was 1.02%. (Table 1).
But no doubt I’m sure we all enjoyed your 6th grade history lesson.
http://eh.net/encyclopedia/article/Smiley.1920s.final
another interesting chart to place next to these would be the national savings rate. it’s probably been plummeting faster than the compensation costs.
america is getting by through this low wage dilemma by expanding debt with the assistance of low interest rates. added liquidity is making up the difference between the true cost of living and wages…
so until the personal debt situation gets drastic, we may see this situation for some time to come.
Economists are side tracked by looking at quarterly changes to GDP, instead of year-over-year changes.
Does anyone know where I can get y-o-y GDP changes, so we can see the rate of growth or decline in GDP?
This is a much better gauge of the economy’s direction.
The economy’s direction is best predicted by looking at real hourly wages, because they best predict consumer spending (2/3 of GDP). Production and capital spending and then employment follow the consumer, lagging by 0-9 months at each step. Yes, capital spending is still high, and will be for some months. But those of us who use leading indicators, know that the consumer is tapped out, and within 1 year, it will show in decreased production, decreased capital spending, rising unemployment. Adjust your stock holdings now.
powayseller,
Here is a fun site
http://eh.net/hmit/gdp/
“the consumer is tapped out”
Just came back from the store and was paying particular attention to how crowded the restaurants were. Talk about ghost towns, even the inexpensive places were empty.
Same thing at lunch, Bahama Breeze, usualy packed, was empty.
8 bucks would fill the tank in the late 90s, today its 35 bucks. That difference is not going to eating out.
This little nugget got my shorts in a knot:
GDP is growing about 3.25%. Same for durable goods: It spiked at a 20.6% pace in Q1 versus plummetting at a 16.6% rate in Q4 ’05.
I know you (novices) think Barry (expert) got GDP wrong having posted it 4.8% but from Table 2 you’ll see that ‘durable goods’ in q4 subtracted 1.6% and this quarter added 1.5% to GDP.
Well, I (novice) haven’t seen refrigerators piling up on the front lawns so I had a look and it’s “vehicles and spare parts”.
Now about that knot: where does this amazing recovery show up in the auto sales?
Not here:
http://www.usatoday.com/money/autos/2006-04-03-car-sales-usat_x.htm?POE=MONISVA
Sorry, DJ
Next time I’ll remember that 6th grade is over your head.
Here’s a blog post describing how 40% of the GDP is smoke and mirrors.
The growth in tax receipts for the first quarter seems to contradict the claim that there’s no inflation in labor costs. In fact, the 11-13 percent jump appears to have started in December per the monthly Dept of Treasury statement
http://www.fms.treas.gov/mts/mts0306.txt
What with the increase in government outlays, it would be astounding if GDP were not to rise.
The media hopped on this pop in GDP quicker than Angelina Jolie adopts kids: “The highest jump in 2.5 years.” and “GDP deflator down.”
As for Q106’s lofty GDP, this was boosted by gulf reconstuction efforts, which we have previously noted, could mask a slow down in the housing sector, and consumer pullback.
The PCE cost index went up 11.5% in the last 12 months. Consumers are spending more, on energy pass through and gasoline. And yes, they are doing it on LESS disposable income. Thats called a suicide squeeze play.
Mike’s Blog Round Up
I am by no means a financial expert, but…if you ignore the national numbers, and examine the average American’s lives, who I believe support the whole thing to begin with, people may be less optimistic.
Anyone who tells me that “we’re doing great” is not talking about the average American.
I was laidoff from the I.T. sector, and took a contracting job. I made approx $2 more an hour, than I did in the early part of 2001, yet I brought home less. How is that possible. I brought home less, and what I did have went not nearly as far as what it would have in early 2001.
Despite all sorts of economic mystical mumbo-jumbo, we have a health insurance crisis, prices skyrocketing at grocery stores, unbelievable housing costs, gas at 3.00 a gallon, and the fastest growing sector of jobs is service related. Oh, yea, we have a rosy outlook. Just brilliant.
Now we may not be able to do anything about 240,000,000 engineers graduating from Chinese colleges vs our 72,000, but surely we could do something to deal with our poor economic policies. Borrowing from a communist country to finance an unnecessary war and curbing NAFTA might be a couple of ways.
Simple fact: If wages are dependent on labor’s contribution to production–and production is rising at 4% while wages are stagnant or slightly negative at 1%–then the corollary is broken ie., an increase in productivity does NOT yield an increase in wages.
Yes, the costs of electronic goods and clothing are in check, but education, health care, and housing are increasing in leaps & bounds.
So here’s the new paradigm: An out of work college grad living in an apartment (or parent’s basement), not able to find employment offering a sustainable wage–or a wage that will help him reduce his student loan, burdened by a sinsus condition he can’t seem to lick, but listening to an iPod while wearing a designer shirt purchased at an outlet mall.