Even Wall Street worries about your paycheck

Slow wage growth is hurting consumer spending, which in turn curtails profits and economic progress, analysts say.

By MSN Money Partner Jun 9, 2014 12:55PM
By E.S. Browning, The Wall Street Journal

Investors aren't heartless, but they usually don't mind when workers' pay doesn't rise quickly.

That is because slow wage increases, while painful on an individual level, usually keep corporate profits high and inflation low, creating better opportunities for shareholders.

And yet, as if anyone needed further proof that we live in exceptional times, Wall Street is now starting to complain that wages are too low.

"Without a real acceleration in wages it is hard to get a meaningful pickup in consumer spending," explained Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch.

Weak consumer spending holds back profits and economic growth, one reason stock gains this year have been soft. Both the Dow Jones Industrial Average ($INDU) and the Standard & Poor's 500 Index ($INX) closed at records on Friday, but the Dow is up only 2.1 percent for 2014, and the S&P is up just 5.5 percent.

The problem is that new jobs often pay less than the ones destroyed in the recession, said Jack Ablin, chief investment officer at BMO Private Bank, which manages $66 billion in Chicago.

"New jobs are coming through at lower wages. Collectively, people have fewer dollars in their wallets even though they have jobs again," he said.

That helps explain why consumer spending fell in April for the first time in a year, according to a May 30 Commerce Department report.

Weak wage gains also are making it hard for the housing market to return to normal, Mr. Ablin said.

He calculates that new single-family home construction is running at less than 500,000 a month. Demographics say it should be twice that, he said.

"People are waiting longer to get married and they are having fewer kids," Mr. Ablin said. That is making them delay home purchases. "It is certainly making us a little more cautious on the economy."

One result: He has cut way back on his holdings of smaller stocks, which are especially dependent on economic growth and whose prices had soared on hopes for the economy. He is moving more of his investment money to Europe, where stocks look less expensive than in the U.S.Businessman with face down on desk © Tetra Images, Tetra images, Getty Images

"If the economy were stronger, I wouldn’t be as worried" about high U.S. stock prices, he said, and he would be moving less money out of small stocks and into Europe.

Merrill Lynch is forecasting that economic growth will rise to a 3.4 percent annual rate in the second half of this year, after shrinking at a 1 percent  rate in the first quarter. But if wages don't pick up, Merrill will have to revise that forecast down, Ms. Meyer said.

Hourly wages rose 2.1 percent  in May from a year earlier, according to Friday’s employment report. That was in line with the recent trend, which is well below prerecession rates.

This angst helps explain one of the year's big conundrums: the behavior of U.S. government bonds. The benchmark 10-year Treasury bond started the year yielding 3.0 percent , well up from the 1.67 percent it yielded in late April 2013.

The rising yields reflected expectations of higher economic growth. In a strong economy, demand for money pushes up interest rates, including bond yields. Investors were widely forecasting a rise in yields to 3.5 percent or more this year, especially with the Federal Reserve gradually eliminating a bond-buying program that held down interest rates.

Instead, the economy turned soft, partly because of terrible winter weather and partly because of more basic problems such as weak wage growth. The 10-year Treasury yield slumped to 2.44 percent late in May. On Friday, it was just below 2.6 percent, up from its lows but still far from where most people expected it to be.

The soft economy has forced many economists to reduce their yield forecasts.

Paul Dales, senior U.S. economist at Capital Economics, a research firm, says wage gains will pick up this year and bond yields will move higher.

But even he has cut his forecast for the 10-year yield to 3 percent at year end, from the 3.25 percent he forecast earlier. If he is right, that would leave the yield unchanged for the full year. Next year, he thinks the 10-year yield will edge up to just 3.5 percent, and he considers himself above the consensus.

Economists were pleased that the economy created 217,000 jobs in May. That sent U.S. payrolls to a record high. It was the first time since the late-1990s boom that the economy created more than 200,000 jobs a month for four consecutive months.

Nice as that was, job gains didn't keep up with population growth. The economy would need to create 7 million more jobs to account for the increase in working-age people since 2008, according to the Economic Policy Institute, a Washington think tank supported by labor unions.

Ms. Meyer of Merrill says wage gains should pick up now that the harsh winter is past, which is one reason she isn't reducing her growth forecast yet. But she is getting nervous.

"Right now the economy doesn’t seem to be supporting" the forecast, she said. "If we had seen 250,000 or more jobs created in May we would be convinced that the economy is picking up in speed. But we didn't see that."

More from The Wall Street Journal

Jun 9, 2014 4:00PM
Wall Street worries about Wall Street and nothing else.
Jun 9, 2014 4:04PM
What good does it do to give huge tax breaks to the very wealthy when they do not re-invest in the USA economy? Wasn't that the whole point of the tax breaks according to the trickle down theory? How do they measure what the tax breaks are really producing for the economy? Why shouldn't everyone pay the same rate on the dollar earned, unless they are REALLY investing it back into the USA economy?

Jun 9, 2014 1:17PM
This wouldn't be an issue if we returned to being a productive society that actually made tangible stuff and exported it or used it ourselves.  As of now, our entire economy is based on consumer spending and service industries - not exactly a solid foundation.  And since we import so much stuff  from Asia that we use on an everyday basis, imagine how vulnerable we'd be if the Chinese convinced a few other Asian nations to stop shipping us stuff - we'd be up a creek without a paddle in a matter of days.
Jun 9, 2014 3:52PM
Sad thing is all of you only focus on the Obama (not recovery) like he has some magic wand. Did any of you go to school? Did you learn what the 3 branches of gov. do? Do you realize that Greenspan kept money to cheap for to long also? Do you like to pay Congress for 6 months of doing nothing up there? Well, other than abortion issues and gay rights that they have voted on 40 times. Took how many years to get a farm bill passed? Congress writes the laws and does the appropriations. Congress has the banking committee and believe me there are some Republicans on it and have been forever. Actually, the Republican banking committee members came up with the idea to change Glass-Segall. Some of you have no real focus other than a political adgenda and MOST middle class Americans are tired of it. Those that have a brain anyway. Oh, and before you call be a liberal, go away Hillary. Why does this country have the same families over and over in the White House? We have no other options?
Jun 9, 2014 5:42PM
Corporations that hide money in offshore tax havens could be using that money to create jobs!

I completely agree with Joseph Stiglitz - maybe they need an incentive - so, only US corporations that create jobs in the US should get tax breaks, and the rest need to pay up like everyone else does!

If corporations are people, then they need to pay taxes like most people do!

Jun 9, 2014 8:43PM
All I can say is LOL.  Wall Street has finally realized that low wages = no spare cash to spend on un-needed things.  The only question that needs an answer is "why did it take them so long to realize that higher wages = more consumer spending and benefits everyone" ?
Jun 9, 2014 4:05PM
Give small to med business a break.... let the Corporations go. They only provide 8% of our jobs.
Jun 9, 2014 4:03PM
Oh, give us a break, the Republican Romney's great feat Staples is tanking too. So much for those jobs.
Jun 9, 2014 11:13PM
"And yet, as if anyone needed further proof that we live in exceptional times, Wall Street is now starting to complain that wages are too low."

Starting?  Does that mean a minority?  The Wall St. billionaires have been putting pressure on Costco to lower its $12/hr wage to $8+/like Walmart despite having made big money off Costco's success.
Jun 9, 2014 6:19PM
No shidt Sherlock?  Where in the eff have you folks been?  This is the end result of globalization and the New World Order and now that we are just about 50% there you guys figure this out? 
Jun 9, 2014 5:37PM
Maybe Wall Street should be worrying about all of the money hidden in offshore tax havens that ISN'T helping ANYONE but the greedy!
Jun 9, 2014 5:17PM
There's high paying jobs that desperately need to be filled out there, too many in fact. The problem is, companies expect you to be Albert freakin' Einstein to get them. These paper pushers who claim to have us dialed in think we're all mathematical geniuses with two college degrees with perfect credit and no criminal record. The bar has been raised WAY WAY too high for most every day Americans. The good carrots are too far out of reach for most of us.  
Jun 9, 2014 2:03PM
I think she will be revising her forecast down, like she has every year since the summer of recovery six years ago. She seem to be holding out hope that negative interest rate will provide the required juice this demand side economy is looking for, I do not concur. 
Jun 10, 2014 3:21AM
Well of course Wall Street worries about how much you make. Wall Street controls the flow of capital, and needs to know precisely how much they can tap us for. Even pond leeches, when it's host is sick, stop feeding and move on to a healthier host for a bit.
Jun 9, 2014 4:08PM
Look at some of the P/E ratios, look at the price paid for a stock on a company that is not even making money, what little guy can buy a 300 dollar stock? Oh, ya they can play the options game. GAME
Jun 9, 2014 7:49PM
I worry about Wall Street's paycheck.
Jun 10, 2014 10:05AM
Welcome to the information economy that was touted as the mecca a few decades ago. No production = no decent paying jobs. No decent paying jobs = no consumer spending. We were supposed to survive on inventing innovations and off shoring production. Doesn't work too well when you don't have decent paying jobs for large segments of the working population. We increasingly have investment bankers and McDOnald's workers. Is there any question why there is no recovery? We need to return to being a production society and give tax incentives to create production jobs here by taxing offshore production for the differential in costs for producing in China and Bangladesh versus the US as income.
Jun 9, 2014 4:07PM
Only about 6 out of 10 working age people have jobs today.  What does that say about the so-called job creators?  We need to recognize that the Great Recession is like a zombie--seemingly dead, but still creating havoc.  At the same time, in order for the economy to do really well, we need to have people working productively.  The key word is 'productively'.  The Koch bros will never do anything really productive--they are another breed of the undead--vampires.  Obama could try harder to get us out of this mess by attempting to push infrastructure projects strongly, along with more efforts to get us out of the old energy industries and into the new. 

The latter will be fought by the obstructionist Republicans, who are short-sighted, ignorant and greedy.  Their motto is: Make Hay While the Sun Shines, oblivious to the fact that following that motto while burning more and more carbon-based fuels is exactly why the sun doesn't shine so well any more, through the haze.  And, why our world is bound to pay the piper, sooner rather than most believe.
Jun 10, 2014 12:18PM
Obama and the hood have almost ruined the value of the US dollar..... Throwing money around and dropping it from helicopters all across the world has made it of no value here in the states and around the world. He has always been worthless and now America is as well....... No respect and no money and today EVEN KIDS ARE COMING FROM THE SOUTH after the scraps.
Jun 10, 2014 12:16PM
With the $15-$20 jobs gone to overseas and with illegals coming in to work for nothing there is no job growth in wages.
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