Friday, April 10, 2015

This is the graph that scares me still

  - by New Deal democrat

Three years ago I ran a post entitled, "This is the graph that scares me," featuring the graph of  median wage growth, which I've updated below:

Below is an abbreviated version of what I wrote then:
[Median wage growth] has been running at under 2% at all times since the financial collapse of 2008.

So, even if inflation runs at the very modest rate of only 2% ..., more than half of all workers fail to keep up.

You simply cannot have a durable economic expansion where most workers are consistently falling behind.

Lower mortgage rates in the last several years has enabled a huge number of consumers to refinance ... [and therefore] the average household has a lower carrying cost of debt, compared with their income, than at any point in the last 30 years.

In the past 30 years,as shown in this graph of mortgage rates, which highlights those periods where interest rates are higher than they were 3 years prior in red, once households have been able to refinance, it took at least 3 years without new lows being established, before the economy fell back into recession.

[in 2012 I continued:]

We just set new lows.

It's difficult to imagine any further round of refinancing once this one is done.  Can rates really go much lower?

If median wage growth doesn't improve soon,  there will be no escaping another recession once the effect of refinancing has run its course ....

[In the Great Recession], we managed to escape without actual wage deflation (although laid off workers may not have been able to find work at the same salary they were making previously).  I doubt we will be so lucky a second time ....

One year ago I updated this post, saying the graph still scared me, and pointing out that YoY growth in median wages was still paltry.

So where are we now?

Here is mortgage refinancing through last week, courtesy of Bill McBride a/k/a Calculated Risk:

Refinancing all but died in mid-2013, and except for a mini-spike at the beginning of this year, has remained asleep ever since.

Refinancing had helped households lower their debt ratios to 30+ year lows:

That deleveraging has all but stopped.

Here is an update of the graph of mortgage rates, focused on the last 5 years:

Mortgage rates bottomed in December 2012.  Eight months from now will mark 3 years since that time.

The good news is, the big decline in gas prices has meant that real median wages have increased to new highs, and most recently nominal median wages have grown at a 2.3% rate.  If gas prices remain low, and if the economic expansion continues for awhile longer, hopefully real median wages will continue to rise.

But I remain very uncomfortable with paltry nominal wage growth. And the next recession is out there somewhere. When it hits, growth in nominal wages will decline.

We entered the Great Recession with wage growth as high as 3.5%, and ended it with 1.5% nominal wage growth.  A similar decline from the current 2.3% nominal wage growth would tip us into outright wage decreases, with all of the horrors of debt-deflation that implies.  This is still what scares me.