Real Aggregate Wages and Recessions

– by a New Deal Democrat

One of my favorite indicators of the overall economic health of the American working and middle class is the real total wages of nonsupervisory workers. This is somewhat self-explanatory; instead of measuring hourly wages, it’s the *total* amount of wages paid to non-supervisory workers, adjusted for inflation. Usually there is no noise, ie. there is a lot of signal compared to the noise. And its growth, or lack thereof, is a good short-term leading indicator of recessions. Since I didn’t update this earlier in the week when inflation was accounted for, let’s look at it now.

Here’s the long-term view of the last 55+ years:

During this time period, real aggregate wages for non-supervisory workers tend to slow sharply and even shift 6-12 months before the onset of the recession, with the possible exception of the 2020 pandemic.

Here’s a closer look at the past 18 months:

The sharp slowdown began in September 2021, 12 months ago.

Looking at the year-over-year change in the data gives us additional insight:

With the sole exception of one month in 1992 and the “unemployment recovery” of 2002-03, real aggregate wages have declined and been negative on an annual basis *only* during recessions and *always* during any recession, although it may not turn negative until several months into the recession. In short, they are an excellent matching marker for recessions.

Here’s the close-up view from May 2021:

Real aggregate wages showed a slowdown in growth at a rate of -0.3%/month during this time. *If* this rate continues, they will be negative by early next year, which almost certainly means a recession.

Finally, let’s compare real aggregate wages to another of my favorite indicators of consumer health, real retail sales. Below I have split the series into 2 periods to make it easier to see the trends:

Real retail sales have either briefly led or matched real total wages over the past half-century, but have been somewhat more erratic, with more false positives for recession (see, e.g., 1966).

Here is the comparison for the last 15 months:

Real retail sales turned slightly negative year-on-year this spring before recovering slightly.

In summary, although the drop in gas prices over the past 3 months has been very helpful, the consumer remains in a truly dangerous situation. Any further deterioration is likely to signal either that a recession is all but imminent or that one has already begun.

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