While a rise in AHE is positive for the economy, too much of a good thing can turn sour, as rising wages eat into corporate earnings. Once again, the R-word. As indicated over the past 35 years, when AHE climbs to 4 percent, a recession typically ensues. In the years 1981, 1990, 2001 and 2008, AHE breached the 4 percent mark right before the country headed into a recession.
But since our most recent financial crisis in 2008, growth in AHE has stayed low, hovering at around 2 percent per year. In 2016, however, we saw wages climb at a faster rate, growing in a range of 2.2 percent to 2.6 percent and hitting a post-recession high of 2.9 percent in December. So right now, AHE is trending higher but still in the “safe zone.”
High AHE numbers make the Fed anxious, which translates into economic tightening and increased interest rates. It’s like the Fed slams the brakes on economic activity. And the byproduct of this kind of slowdown is very often a recession. But remember, we’re far from the 4 percent mark now.
So the question becomes, how much time do we have if AHE continues to rise? Looking at historical data, it takes about five and a half years for AHE to bottom out. Arguably, this is what happened around October 2012. Using this timeline, we would have until mid-2018 before AHE hits 4 percent again and harkens the risk of a recession.
Though Average Hourly Earnings is an important variable to watch, it’s not the only factor influencing the economy — markets don’t rise and fall in a vacuum. While focused on general inflation and AHE, the Fed keeps a broad view of economic data points. As workers and investors, it’s good practice to look through the same lens as the Fed. While we can’t predict or prevent a recession, being aware of market trends can help us guide our investment strategies and make better decisions for the long run.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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