All Access Week – Employee Compensation

At Prometheus, we are committed to equipping our clients with the most granular, high-frequency, and actionable understanding of macro conditions in the industry. We offer our clients a range of research solutions, from big-picture macro themes to actionable trading signals. In the spirit of giving back to the community, we are excited to offer an All-Access week in our Institutional Services. Each day this week, we will unveil one product offering from our extensive Institutional Offering. If you’re interested in institutional access, please contact us at [email protected].

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

Our primary takeaways are as follows:

• Our estimates for real incomes showed a sequential increase of 0.02%. Nominal income increased marginally, primarily driven by real wage growth.
• However, a reduction in the total number of hours worked posed a significant headwind. Looking ahead, the current path for real income is inconsistent with a recessionary path but has muted in line with a slowing economy.
• In the context of markets, consumer equities have decreased driven by a deceleration in earnings expectations and valuations. Our strategies remain modestly long stocks and bonds, and short commodities.

Our latest estimates for July showed real employee income increased by 0.02%. This data showed an acceleration in the quarterly trend relative to the one-year trend. We show the evolution of the sequential data below:

This estimated real income data came alongside a nominal income change of 0.01%. We can decompose this nominal wage growth into growth from employment, hours worked, real wages, and wage inflation, which contributed 0.07%, -0.29%,0.24%, and -0.01%, respectively, to nominal income. We show the sequential evolution of this compositional data below:

We further decompose these macroeconomic drivers by industry. Below, we visualize the contributions to total nominal income coming from each industry, broken into its drivers, ranked from left (weakest) to right (strongest). As we can see below, nominal income was generally positive, with Professional and Business Services contributing the most to strength and Construction dragging on nominal income growth:

For further perspective, we show how nominal employee income has evolved over the last year, with nominal income growth of 4.86%, 2.14% of which came from real growth. Over the last year, nominal income has primarily been driven by Wage Inflation, which has expanded by 2.67%. We display this below:

Digging into the industry-level data, we find that nominal employee income over the last year has been positive across the board, with Education and Health Services, Professional and Business Services, and Construction contributing strength (shown in shades of blue). On the other hand, Mining and Logging, Utilities, and Nondurable goods are the weakest areas of income (shown in shades of red). Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Nominal incomes are rare to contract, given the persistence of wage inflation. As such, they can often be a poor indicator of cyclical conditions. To better understand these dynamics, we turn to real employee income, which over the last year has largely been positive, with Education and Health Services, Professional and Business Services, and Construction contributing strength (shown in shades of blue). On the other hand, Retail Trade, Information, and Mining and Logging are the weakest areas of income (shown in shades of red):

Below, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Further dissecting this real income, we examine employment, typically the primary driver of real growth. Over the last year, employment growth has largely been positive, with Education and Health Services, Construction, and Professional and Business Services contributing strength (shown in shades of blue). On the other hand, Information, Mining and Logging, and Nondurable goods are the weakest areas of employment (shown in shades of red). Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Next, in our analysis of real income, we turn to the number of hours worked by employees. Over the last year, growth in hours worked has largely been weak, with Wholesale Trade, Construction, and Leisure and Hospitality contributing strength (shown in shades of blue). On the other hand, Education and Health Services, Professional and Business Services, and Durable goods are the weakest areas in terms of the number of hours worked (shown in shades of red). Additionally, we show the yearly change in the data, along with the underlying diffusion of industry growth:

Next, we show the yearly change in the data, along with the underlying diffusion of industry growth:

The final component of our analysis of real incomes is real wage growth. Over the last year, real wages have largely been positive, with Durable goods, Professional and Business Services, and Financial Activities contributing strength (shown in shades of blue). On the other hand, Retail Trade, Nondurable goods, and Wholesale Trade are the weakest areas of real wage growth (shown in shades of red). We show total real wage growth and our diffusion index but note that diffusion data is not available for the full sample due to data limitations:

We show total real wage growth and our diffusion index but note that diffusion data is not available for the full sample due to data limitations:

Now that we addressed the drivers of real income, we turn to wage inflation. Over the last year, wage inflation has been positive across the board, with Professional and Business Services, Education and Health Services, and Financial Activities contributing strength (shown in shades of blue). On the other hand, Mining and Logging, Utilities, and Nondurable goods are the smallest contributors to wage inflation (shown in shades of red).

We show total real wage growth and our diffusion index but note that diffusion data is not available for the full sample due to data limitations:

Next, we turn to how the economic data has been reflected in markets. While nominal income is good for GDP, spending relative to income produces gains for corporations, which flow through to equities. At the same time, companies also pay costs in the form of wage inflation and other input prices. Therefore, we compare real incomes to earnings expectations for consumer equities below. As we can see the direction of travel of consumer equity earnings expectations is consistent with real employee income.

Moreover, consumer equities have underperformed the broader equity market. We visualize this below:

Finally, we conclude by peering around the corner to understand the prospective path ahead for real employee income. As we can see below, the current trajectory is inconsistent with a recessionary path. We show this below:

Overall, our estimates for real incomes showed a sequential increase of 0.02%. Nominal income increased marginally, primarily driven by real wage growth. However, a reduction in the total number of hours worked posed a significant headwind. Looking ahead, the current path for real income is inconsistent with a recessionary path but has muted in line with a slowing economy. In the context of markets, consumer equities have witnessed a deceleration in earnings expectations in line with a slowing but growing economy. Our strategies remain modestly long stocks and bonds, and short commodities. Until next time.