Surely, faster wage growth is still possible, as demonstrated by the 1990s. But to overcome secular headwinds, productivity needs to rise. So far, despite a stronger labor market, that trend has yet to emerge.
While this is a longer term story about decades-long trends in the economy, it does lead to some implications for investors in the shorter term. First, softness in income growth implies less inflationary pressure, while lower household spending could slow overall economic growth. If these conditions take hold, interest rates would likely remain at low levels for a long time, despite the Fed’s likely increase in rates later this year. Second, slow wage growth is partly behind the lackluster household spending we’ve seen. If that continues, caution may be warranted around consumer discretionary stocks. These have performed well year-to-date, but it makes sense to pick your spots carefully going forward. Be wary of companies whose valuations are counting on a surge in consumer spending and focus instead on those with potential to take market share from their competitors.
Source: Bloomberg.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.