Figure 10-10: Real hourly earnings: A useful leading indicator of stock market direction
Slowing and rising year-over-year real hourly earnings growth (green line) have been a generally reliable leading indicator of, respectively, forthcoming downturns and upturns in Y/Y consumer spending (black line). In turn, these have been followed by slowdowns and advances in the economy in general and, therefore, have also been a signal of forthcoming declines and upturns in the stock market (vertical yellow bars).
Important: Real hourly earnings are reported on a pretax basis; therefore, changes in the Federal tax rates can create important anomalies in the usefulness of this series. Federal tax cuts in the mid to late 1980s and in 2003 resulted in periods of continued growth in consumer spending despite falling real-wage growth in these periods. This postponed what likely would have been significant bear markets during these periods (although at the cost of ballooning Federal deficits).
Current Comment: The upturn in growth of real hourly wages (purchasing power of the 90%+ employed) in late 2008 and 2009 resulted from lower energy costs and sagging consumer prices during the 2008 downturn. This provided evidence that the stock market would recover in 2009. The strong continuing recovery in Y/Y real hourly wage gains provides encouragement on the consumer-spending and, therefore, the general economic outlook over the next 6 to 12 months. This needs to be monitored closely, however, for signs of an uptick in consumer price inflation that might erode future purchasing power.
