How to Obscure one of the Biggest Economic Problems in the US

By Doug Short, Advisor Perspectives:

Earlier this week I updated my commentary on Five Decades of Middle Class Wages, an analysis of Real Average Hourly Earnings of Production and Nonsupervisory Employees. During the 21st century and especially since the end of the Great Recession, wages have clearly been stagnant.

But, as Mark Twain famously remarked, “there are three kinds of lies: lies, damned lies, and statistics.”

I was, therefore, not surprised when a reader sent me a link to a blog article entitled “Real Wage Stagnation Is a Bit of a Myth.” Seriously! The article featured a chart that included the very same earnings data series that I had used, but it came to quite the opposite conclusion:

“Contrary to popular belief, wages have been rising a bit faster than prices. In other words, real wages haven’t stagnated as widely believed, but have been moving higher, albeit at a slow pace.”

All it takes is a simple statistical manipulation to paint a smiley face on the real wage data. And what is that? Choose a tame deflator for your inflation adjustment.

Below are two charts of the Average Hourly Earnings of Production and Nonsupervisory Employees stretching back to 1964, the year the Bureau of Labor Statistics (BLS) initiated the series. The top chart is my analysis. The one below it is the optimistic variant that claims stagnation is a “myth” (click them for larger versions).

US-Real-hourly-earnings-1964-2014_Doug-Short

US-real-hourly-earnings-1964-2014-PCE-deflated-Doug-Short

In the top chart above, I adjusted for inflation using the Consumer Price Index for Urban Consumers, the deflator we commonly refer to as the CPI. This index is produced by the BLS, the same agency responsible for the monthly Establishment Survey from which the wage data is derived. The CPI is by far the most widely used index for gauging inflation. Its first cousin, the CPI-W, has been used by the government for Social Security Cost of Living Adjustments since the origin of COLAs in 1975. Another close cousin, the CPI-U-RS (an annual index) is used by the Census Bureau to calculate Real Household Incomes.

In contrast, the “stagnation is a myth” article used the Bureau of Economic Analysis’s Personal Consumption Expenditures Price Index for inflation adjustment. That’s the deflator I used in the lower above. The BEA is an agency of the Department of Commerce. Their PCE deflator and their somewhat similar GDP deflator consistently show lower inflation than the Depart of Labor’s BLS. How different? Here is an overlay illustrating the cumulative change in CPI and the PCE Price Index since 1960.

Click to View

I’m confident that the Labor and Commerce departments produce their respective inflation data with honest intentions.

However, I would point out that the most closely watched metric of the overall economy, Real GDP, is inversely correlated with inflation: The lower the inflation index, the higher our Real GDP and (presumably) the happier our business environment, which is the main purview of the Department of Commerce. And as I pointed out above, the Census Bureau, which is also within the Commerce Department and a sister agency to the BEA, uses the CPI-U-RS to calculate Real Household Income rather than the BEA’s PCE Price Index.

Wages During the Recovery: Distinguishing Myth from Reality

Here is an overlay comparison of the growth of Real Average Hourly Earnings of Production and Nonsupervisory Employees since June 2009, the month when the business cycle expansion officially began. One uses the BEA’s PCE Price Index, the other uses the BLS’s Consumer Price Index.

As we can clearly see, real wage growth with (in my view) the “correct” deflator is stagnant. In fact, if we use its cousin, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the stagnation is actually worse.

As I mentioned earlier, the CPI-W is the inflation gauge used by the government for Social Security COLA adjustments, which perhaps enhances its credibility as the preferred deflator for wages. Note also the BLS’s specific designation for this deflator: “for Urban Wage Earners and Clerical Workers”.

Does Janet Yellen Think Wage Stagnation is a Myth?

On Friday Federal Reserve Chair Janet Yellen was the headline speaker at this year’s Jackson Hole summit for central bankers. Does she endorse the optimistic claim that real wage stagnation is a bit of a myth? Apparently not. Her summit speech included the following assertions [bolding added by me]:

Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation. Indeed, in real terms, wages have been about flat, growing less than labor productivity.

In closing, I will state something that I hope is obvious to my readers: My personal goal is to analyze economic data in an ongoing search for reality … aka “the truth”. But sometimes the truth can be obscured by “Lies, damn lies, and statistics.” By Doug Short, Advisor Perspectives

It has been tough out there. Retail sales, about a third of consumer spending, were supposed to increase 0.2% in July, according to the inveterate optimists that economists have become. That didn’t happen. They stagnated, not adjusted for inflation. And inflation, tame or not, knocked real retail sales for June and July into contraction. Read…. This Chart Is a True Picture of What’s Dragging on the American Economy

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  15 comments for “How to Obscure one of the Biggest Economic Problems in the US

  1. Orlando
    Aug 24, 2014 at 7:14 pm

    I have to say, the stats belie the problem. Using original statistics of John Williams (shadow government statistics), there is NO doubt of wage shrinkage. The current system reflects the fact that money needs to continue growing on trees, in order to fund this economy. A better system would be to use either the MIT billion prices project, or Gallup. Ironically, I got the site address from an article Mr Short had written previously.
    The website for shadow government statistics can be found here: http://www.shadowstats.com/alternate_data/inflation-charts

  2. Miggy
    Aug 25, 2014 at 7:07 am

    A big reason inflation is not much higher is because of wage stagnation. Even though prices up and down the supply chain get higher companies can still tame prices of goods to some degree because they can pay workers so little.

    That beef McDonalds is selling for $1 is not getting cheaper.

    • Matt R.
      Aug 25, 2014 at 7:34 am

      We’re seeing all kinds of layoffs as well as companies offering less for the same amount (think food packages).

      Much of our issues stem from going away from a monetary system tied to gold in 1971. Since then we’ve had higher unemployment, deficits, and overall higher prices.

      • dc.sunsets
        Aug 26, 2014 at 5:40 am

        Prechter has documented that the monetary system change dates from taking silver out of coinage in 1965. Up to that point, the real value of industry in the USA rose at an astonishing pace. After that, whether using CPI-adjusted dollars or the price of gold as a divisor, the aggregate value of industrial America has experienced vast swings downward, back to near flat, and now downward again.

        This way of looking at “prices” (including wages and the value of firms) seems to far better match what most of us truly experience, namely that all the iGadgets in the world cannot mask the economic deterioration and social decay of the past 50 years.

      • John
        Aug 26, 2014 at 8:04 am

        “We’re seeing all kinds of layoffs as well as companies offering less for the same amount (think food packages). ”

        Exactly, Microsoft lays off 18,000 highly paid employees, but the economy is zooming along.

        That’s how they formed their illusion that we have an economy – huge layoffs, buying their own stock back, downsizing the products they sell us, along with running the printing presses 24/7.

    • John
      Aug 26, 2014 at 7:39 am

      “That beef McDonalds is selling for $1 is not getting cheaper.”

      And its not even real meat, with up to 80% fillers. Remember the pink slime.

  3. Penny Allen
    Aug 25, 2014 at 9:45 am

    With the US labor force compensation equilibrating with other nations’ labor forces in the global economy, how can anyone expect anything other than flat to declining wages in this country?
    This is the paradigm we are in and until we do something about the corporate tax structure which is still causing off shoring, we can expect labor force participation to continue to shrink also.
    I am sick of the Fed hiding what it is really doing-keeping interest rates low so the govt can service the interest on the Federal debt-behind the ‘promoting full employment’ ruse. I believe there’s no connection whatsoever.
    Until we get some ‘structural reform’, our economy can do nothing but shrivel in the face of increased global competition. The US needs to shrink govt and its stifling regulation and revamp the abominable tax structure.

    • Miggy
      Aug 25, 2014 at 1:05 pm

      You hit the danger. The USA cannot grow out of this mess because the manufacturing base has been gutted. Bottom line is workers in the USA are competing for jobs with China and Mexico so wages across these countries get closer to equilibrium. Low end workers are also paying for the inflationary policies of the Fed. Lovely.

      I agree about structural reform but I would not hold your breath or we would not be in this planned mess. I really think boycotting should become more mainstream.

      • John
        Aug 26, 2014 at 9:13 am

        “boycotting should become more mainstream”

        Boycotting was the only answer to all the criminal activity coming from Management in this country.

        Everybody should have figured that out after all of Obama’s campaign lies:

        1. End NAFTA/CAFTA Bring back high paying jobs to America.
        2. Prosecute wall street & the banksters for fraud & corruption
        3. Prosecute Bush/Cheney for Iraq war crimes.
        4. New 911 investigation
        5. ETC, ETC, ETC

        There’s been NO Change, The are all following the PNAC think tank minutes that called for a new Pearl Harbor = 911, Then the 100 year war of terror.

        Then their list of 7 countries that they are invading & doing regime change & forcing back on the dollar, which now seems to include Russia/China since they dumped the dollar a month ago amongst themselves.

    • Aug 25, 2014 at 11:00 pm

      Just a reminder: “Structural reforms” were the various changes brought to the Greek economy, which is run by one of the most corrupt political systems in the developed world (oh, I forgot, after five years of sharp recession, Greece has been re-emerged, that is kicked out of the developed world and reclassified as an emerging country). Those “structural reforms” brought about, among other goodies, drastic wage cuts at the very bottom of the scale, including minimum wages. However, the pay of the elite and of the members of said political system does not appear to have been hit. Gutting the people’s wages has caused demand to go into a death spiral….

      So “structural reforms” are to be taken with a grain of salt.

    • dc.sunsets
      Aug 26, 2014 at 5:55 am

      It seems oversimplified to imagine that free global trade leads to wage equilibration. Culture actually does matter, and while many believe Asian countries (with large, well-educated and hard-working populations) will inevitably pass the sclerotic West, there may be an under-appreciated difference in cultural contribution.

      My son, a mechanical engineer with a major international manufacturer, notes that while Chinese engineers are often bright and competent, in his experience they are culturally biased to lack the status-quo-challenging innovation those in the USA take for granted. Perhaps his sample size is too small, or contains selection bias, but his observation mirrors parallel views from others with experience among the Japanese, Chinese and Koreans.

      The future looks to be increasingly unkind to unskilled, untalented people everywhere, so simply living in America may no longer automatically mean “Easy Street.” As manufacturing rises in the USA, the costs of the Nanny State will likely add to the impetus to depopulate the factories in favor of automation since robots don’t unionize, don’t get sick, don’t sue for wrongful termination or racial discrimination and don’t have the alphabet soup of government agencies circling like vultures over every firm.

      The bad news: The USA will at best increasingly resemble the EU area, drowning in red tape, redistribution of wealth and permanently high unemployment. The good news: Talented people will still find ways to thrive, and there are plenty of beautiful places to live in North America.

      • Miggy
        Aug 26, 2014 at 6:34 pm

        It depends on your definition of “unskilled and untalented people”. Although I do not disagree with your premise completely not eveyone is cut out to work behind a computer, spend four years getting more education, or in upper level white collar management.

        My grandfather worked his way up to shift manager after working years 3rd shift at a manufacturing plant. My grandmother retired as an office worker at a well guitar manufacturer. They both took vacations every year, lived very modestly but owned their own home outright, and we always had a well paid for Christmas. Above all they made good interest on their savings and retired and lived very comfortable well into their nineties.

        I consider the work ethic and responsible attitude of my grandfather skilled and talented. A kid graduating high school these days with those traits are going to have a very difficult if not impossible time doing what my grandfather did.

        So I do take issue with your definition of talented.

  4. Miggy
    Aug 26, 2014 at 6:44 pm

    “As manufacturing rises in the USA”

    Please explain this in more detail.

    Also, I am not trying to be a jerk or confrontational but when you say:

    “so simply living in America may no longer automatically mean “Easy Street.”

    America has never meant easy street. I am not going to go into detail about what I have seen growing up but my experience has seen successfull business owners and blue collar workers working their butts off to get the good living they had. I can’t even imagine what the settlers had to go through tredging through the mountains. America was built by extreme hard work and rugged individualism. Easy street is not in the fabric of America, we have the best work ethic in the world.

    Don’t let the pundits fool you about all the people on food stamps eirther. I have known very hard working people that had to go on food stamps simply because the wages have not kept pace with inflation even they hold very important jobs helping people.

  5. Miggy
    Aug 26, 2014 at 6:53 pm

    when you say “Chinese engineers are often bright and competent, in his experience they are culturally biased to lack the status-quo-challenging innovation those in the USA take for grante”

    They may be culturally biased but above that they are scared to make waves with the state. America was built on freedom which is why for a country just over 200 years we have ran rings around countries that have been around for much longer with our innovation. Freedom and work ethic my friend.

    America is the most technologically advanced country in the world by far.

  6. RealistTheorist
    Aug 27, 2014 at 7:52 pm

    Off-topic, but the Twain quote was Twain attributing the quote Disraeli, and it turns out that the actual source was not even Disraeli.

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