Workers Drown Despite Hottest Wage Growth On Record

Consumer psychology improved in the back half of July, a revised read on a key gauge of sentiment suggested.

“Improved” is an extremely relative term. The final print on University of Michigan sentiment for July was 51.5, up slightly from the initially reported 51.1, and only marginally better than June’s record low. The range of estimates, from nearly four-dozen economists, was 49 to 52.5.

The data came on the heels of a third consecutive decline in the Conference Board’s gauge, which is catching down to the Michigan survey. Consumers’ assessment of current conditions was sunnier compared to June, even as the outlook was mostly cloudy (figure below).

Note that Friday’s Amazon-assisted gains had US equities poised to close out the best month since November 2020 on a high note. July’s stock rebound may have contributed to an improvement in the public’s assessment of current conditions. But, again, “improvement” is relative. The index (dark pink line in the figure, above) is down more than 30% from July of 2021.

Although consumers are less worried about geopolitics, concerns about domestic issues, including and especially inflation, are pervasive. “Inflation continued to dominate consumers’ attention, and labor market expectations continued to soften,” Joanne Hsu, director of the Michigan survey, said Friday.

She mentioned the slowdown in consumer spending from Q2’s disappointing GDP report. “This month’s Sentiment Index was the second lowest reading on record, and the Q2 slowdown in personal consumption expenditures was no surprise,” Hsu, a former Fed economist, remarked.

Separate data out Friday provided market participants with a more granular look at spending during the final month of a quarter during which the world’s largest economy unofficially fell into recession if you subscribe to the two-quarter rule (the NBER waved away recession speculation in ambiguous remarks to Bloomberg on Thursday).

Personal spending in June rose 1.1%, more than expected and also managed to gain in real terms following the first decline of 2022 (figure below).

Real disposable personal income fell for the second time this year. The savings rate dropped to the lowest since 2009.

Recall that the Michigan survey showed Americans harbor a singularly dour view of their personal finances. Data on real wage growth accompanying Friday’s crucial employment cost index release from the BEA served as a reminder of why consumers are so concerned despite record gains in nominal compensation.

In constant dollar terms, wages and salaries for private industry workers fell 3.1% on a 12-month basis during the second quarter, suggesting workers are slowly (or quickly) drowning.

It was the most miserable print on record if you don’t count Q1 (figure below).

Inflation expectations in the Michigan poll were basically unchanged from the preliminary July readings. Consumers expect inflation to run at 5.2% during the next year and 2.9% during the next 5-10 years.

Late last month, The New York Times detailed how consumers are coping with a generational price shock. Tara Siegel Bernard spoke with a number Americans, including 66-year-old Connecticut resident Harold Topper who’s “resorting to psychological tricks to blunt the pain.”

“These days, Mr. Topper fills up his gas tank when it dips by a quarter, because it costs just $25 to refill,” Bernard wrote, explaining that “in his mind, the price is more palatable than at the half-tank mark or worse.”

Topper posed a question: “After all, isn’t perception reality?”