I have written on this last week but BloombergBriefs recently featured the trend:
(…) Markets tend to focus on the main headlines of the employment report, such as the net number of jobs created or the change in the unemployment rate. In terms of gauging the implications for the broader economic outlook, though, it’s aggregate income that matters most. Consumer spending accounts for nearly 70 percent of GDP, so the ability of households to sustain consumption over an extended period — via employment income — is critical to the outlook. The recent trend is sending an encouraging signal.
Aggregate income is the product of total employment, the average length of the workweek and average hourly earnings. This proxy for private-sector employment income is a useful barometer of private-sector wage and salary growth, as shown in the accompanying chart.
To be sure, the acceleration in the pace of hiring over the past three months is a strong positive for income growth, but the aggregate impact is further magnified by the fact that the length of the workweek is also at a post-recession high (of 34.6 hours). While seemingly undramatic, small changes in the length of the workweek have a significant impact on aggregate hours worked because private-sector non-farm employment totals almost 120 million workers. (…)
Even with wage inflation still muted, aggregate income growth has displayed a substantial acceleration over the past few months, and this is being further amplified by decelerating consumer inflation. (…)
As of last October, aggregate income growth was 4.6 percent; it crossed above 5 percent in December and stood at 5.7 percent as of the January employment.
With inflation falling to nearly zero thanks to lower energy prices, real income growth is now rising at a very fast clip and benefitting all income segments, particularly (finally) the low and middle income class.
In the shorter term, the impact on overall GDP will be mitigated by the headwinds from a stronger dollar, slow export markets and declining energy and farm sectors. But the seeds will blossom into a potentially stronger economy during the second half.
Other economies will also benefit from lower oil prices.
As a case in point, last week I posted on the stronger retail sales in Europe, pointing out that total retail sales volume recorded its third consecutive monthly increase in December. Core sales volume surged a surprising +12.1% a.r.. This chart from Pictet illustrates the uptrend. Note that these are real (deflated) sales data.
Europe being Europe, country trends differ significantly:
Importantly, Germany (+13.4% a.r.) and France (+6.1%) both had strong sales to finish the year. Spain has been a huge drag on EU data but its Q4 sales volume surged at a 10% annual rate bringing its December sales volume up 6.6% YoY. Italy being Italy, we are still awaiting its December data…
In all, deflation is not impacting consumer behaviour just yet and lower oil prices, down 42% in euro terms since June 2014, could well be doing most of the job for the ECB.
Also: the contribution of government spending to real GDP growth in the euro area as a whole should increase from 0.1% in 2013-14 to around 0.5 percentage points over the next two years. The peripheral countries should see a growth boost of around one percentage point. (BCA Research)