Figure 10-10: Real hourly earnings: A useful leading indicator of stock market declines
Slowing year-over-year real hourly earnings growth—as a generally reliable leading indicator of forthcoming downturns in year-over-year consumer spending (black line), followed by the economy in general—has, therefore, also been a signal of forthcoming declines in the stock market (vertical yellow bars).
Real hourly earnings are reported on a pretax basis. The apparent anomaly of strong growth in real consumer spending despite slowing real hourly earnings in the mid to late 1980s and in 2003 is attributable to the 1982/1986 and 2003-early 2004 tax cuts. This also helped prevent significant bear markets during these periods.
Current Comment: The relatively consistent growth in consumer spending of the past four years despite significant attrition in real hourly earnings growth is an anomaly vis-à-vis 40+ years of history between these two indicators. This is due in large part to consumers’ unexpectedly protracted borrowing binge. This has helped prevent a serious downturn in corporate-profit growth, and the stock market has thus moved to new highs despite the slowing in consumer-spending growth.
