Long term: Advancing technology is also creating downward pressure on wages, eliminating many middle-income jobs. At the same time, there is the global wage arbitrage, i.e. the fact that many jobs are still going overseas, putting downward pressure on U.S. wages and upward pressure on wages in other countries such as China (though some manufacturing jobs may actually come back to the United States because of the U.S. energy renaissance). Finally, as the labor force participation rate has dropped — in other words, as fewer people are in the workforce — overall U.S. disposable income growth at the aggregate level has been slowing.
So what does this mean for investors? I expect that income growth will get a bit better in 2014 as the labor market continues to improve and cyclical headwinds start to lesson. However, to the extent that the long-term forces I mention above remain in place, I expect to see slower income growth going forward over the long term.
This, in turn, probably means slower U.S. consumption and a somewhat slower U.S. economy (the somewhat because the U.S. energy renaissance will likely continue, with manufacturing becoming a larger part of the U.S. economy over time). As such, I continue to advocate remaining cautious of sectors dependent on middle-class consumption and I continue to like more manufacturing-focused sectors of the market such as energy and technology.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Source: December Market Perspectives