Skip to navigationSkip to content
Sponsor Content By 2013 iShares

The missing ingredient of the economic recovery (hint: it’s not jobs)

By gbaconqz
Published Last updated This article is more than 2 years old.

By Russ Koesterich, CFA
Chief Investment Strategist, BlackRock

Despite an improving labor market, household spending isn’t picking up enough to fuel a faster U.S. recovery. This missing ingredient of the economic recovery is to blame, says Russ.

Tomorrow, we may get the latest evidence that the jobs market continues to slowly improve when the Labor Department releases its weekly jobless claims report. Yet despite an improving labor market, household spending isn’t picking up enough to fuel a faster recovery.

Why? As I write in my new Market Perspectives paper, Wage Woes, the big missing ingredient is a lack of real income growth. In other words, an improving jobs market isn’t translating into higher wages for the vast majority of the population, meaning very few can get a raise.

Now, how bad is it? Well, if you look over the last 50 or 60 years, household income typically has risen by about 3.5% annually after inflation, fueling a 3.5% or so gain in consumption. However, since the recession ended three years ago, we’ve seen household income gains roughly half of that. And this year, things are even worse. For 2013, real, or inflation-adjusted, household income growth is averaging only about 1%.

There are short- and long-term factors to blame.

Short term: In the short term, one major factor behind the muted wage growth is ongoing political and fiscal uncertainty in Washington. Even though fewer companies are laying employees off now than during the last recession, the pace of hiring isn’t as great as it would have been if there was more stability in Washington. And if hiring doesn’t increase at a faster rate, then there’s no upward pressure on wages.

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 BlackRock Chief Investment Strategist 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

This article was produced by iShares and not by the Quartz editorial staff.

—————

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. Index returns are for illustrative purposes only. Indexes are unmanaged and one cannot invest in an index. Past performance does not guarantee future results.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by visiting www.iShares.com or blackrock.com or by clicking the Prospectuses link above. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), JPMorgan Chase & Co., MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group or S&P Dow Jones Indices LLC, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

©2010-2013 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

📬 Kick off each morning with coffee and the Daily Brief (BYO coffee).

By providing your email, you agree to the Quartz Privacy Policy.