by Jason Norris, CFA
Executive Vice President of Research
Earlier this month, the U.S. Labor Department released its monthly jobs report, which continued to show the strength in the U.S. workforce. The unemployment rate is sitting at multidecade lows of 3.5 percent and there are currently over seven million job openings. This tightness in the labor force is starting to affect wages. While wage gains have been anemic this expansion, the last year has finally shown +3-percent year-over-year gains. While these gains have stabilized, what continues to expand are wages for lower-income workers, as seen in the chart below.
Source: Federal Reserve
Earlier this year, there was an acceleration in the growth of non-supervisory and production workers, which are typically lower-income employees. This is key indicator of the strength of the U.S. economy and labor market. The gains are being felt broadly, which is positively impacting consumer confidence.
Higher wages and increased consumer confidence will likely result in … more spending. Bank of America looked at some of their proprietary credit and debit card data and found that for every $100 of extra income, the bottom 50 percent of households spend $137 while middle-to-upper income households spend only $52. This can be seen in their chart highlighting spending growth for various income cohorts.
Source: B of A Global Research, BAC internal data
While the Great Recession can barely be seen in the rearview mirror, an overleveraged consumer is still a concern. If shoppers are taking on additional debt for consumption, is this going to end the same way as 2008? Fortunately, the consumer is in a much better place than they were 10 years ago. While their overall debt, which includes mortgage and credit, is at an all-time high, their debt service is the lowest it’s been since 1980. The chart below highlights the last 20 years of consumer debt levels and comparing it with the service costs.
Source: Federal Reserve
Week in Review and Our Takeaways
Markets had an eventful week with the Fed holding interest rates steady, impeachment hearings and a tentative deal with China regarding certain tariffs
While the impeachment should have minimal effect on markets, news about interest rates and tariffs, while expected, helped soothe investors somewhat
While the U.S. consumers balance sheet shows more leverage, they have ample cashflow to service it
This reinforces our belief that a U.S. recession is not in the cards for 2020