One of the key concerns of the market has been that consumption would fall once enhanced unemployment benefits ended and stimulus checks rolled off. We believe that, while that could still be the case, the more likely outcome is that consumption, which is nearly 70% of GDP, will be supported by growth in incomes.
While it’s fair to say that disposable incomes have increased due to government transfers (stimulus payments and unemployment benefits), they have benefited more from increased compensation. Annualized compensation in September was $12.6 trillion, which was mostly wages and salaries and represented an increase of $747 billion since February 2020. By comparison, government transfers were $697 billion higher during that same timeframe after being as much as $4.9 trillion higher in March 2021.
Drilling down on average weekly earnings, those were $1,074 in the latest payrolls report. Primarily due to wage gains, earnings nearly equaled the unemployment benefits received under the CARES Act ($600/week plus 50% assumed unemployment insurance or UI) and were substantially more than benefits under the last stimulus package ($300/week plus UI). Even the struggling Leisure and Hospitality sectors have seen an earnings pick-up of nearly $63/week since before the pandemic, and are close to levels that would have been received under the last stimulus package. These incomes are more sustainable than the enhanced unemployment, which had fixed end dates, and should continue to support spending as opposed to savings.
A key question is whether deterioration in savings will bring people back into the workforce, potentially moderating wage growth. The October employment report would say no. Average hourly earnings were up 4.9% year-over-year for the month, the highest rate all year. Additionally, it appears that even higher wages and/or benefits may be required to move people into the labor force given the still large gap between worker demand and the number of unemployed persons.
With prospects for employment and wages remaining firm, it’s difficult to get particularly bearish on consumption and, by extension, growth. That doesn’t necessarily mean booming growth, but rather a firm baseline. This should allow investors, who normally obsess over consumption given its large weight in growth, to focus on inflation (our view is greater persistence at levels above pre-pandemic levels) as well as impacts to investment and trade given likely central bank policy changes.