I have discussed the relationship between the hourly earnings growth and the expansion of employment by small businesses. Small firms are very optimistic as is shown in the NFIB small business survey. With optimism and demand for labor prevalent, increasing wages should follow. The net compensation reading for April 2017 was one of the best readings since February 2007. 87% of small businesses are complaining that there’s not enough qualified applicants for their open positions. This is a sign of a very tight labor market which is surprising given the small increases in hourly wage growth. 16% of small businesses stated that finding qualified labor was their top business problem which is near a record high. That’s another sign of a tight labor market.

The chart below shows the 3-month moving average of small business compensation plans advanced 18 months based on survey data. These compensation plans will reach the levels associated with full employment in the next 6 months. This means hourly earnings growth, which has lagged the prior two cycles, should start to pick up in the next few months. If wage inflation picks up, the Fed will be woefully behind the curve because it should be at the end of its hiking cycle by then, not only a few hikes in. That’s especially true given the fact that interest rates were taken too low during the easing period.

An improvement in hourly earnings growth would be welcome news to the apparel retailers who had their stocks slammed lower on Thursday. The decline was led by Macy’s stock which was down 17% because of a poor earnings report. Adjusted earnings per share came in at 24 cents which was much below expectations of 35 cents. Revenues of $5.34 billion were below estimates for $5.47 billion. Same store sales dropped 4.6% which was below estimates for a 2.7% drop. Macy’s is in one of the worst categories. No matter what it does, whether it’s store closings or adjusting the in-store products, the company cannot get out of this funk. A less than robust consumer combined with the propensity to shop online has caused this funk. The aggregate earnings of the S&P 500 will come down slightly when I update them on Monday because of these disappointing results from consumer discretionary firms. Given the already muted expectations, the fact that Macy’s was still able to miss estimates shows how out of control the situation is.

The meaning of economic metrics is always changing. I think metrics have particular difficulty during this new era of central bank interventionism. I have already mentioned that hourly earnings growth can be impacted by the length of the work weak. It’s also worth noting that the size of salaries relative to the total compensation packages has been declining.

The chart below shows that since 2008, total wages and salaries as a percentage of total compensation have fallen more than 1%. This is being caused by rising healthcare costs; it is potentially limiting hourly wage growth. The consumer has less disposable income because it must pay more for healthcare. The current trend of healthcare prices must be dealt with because it’s eating into the economy. The increase in healthcare spending being caused by the aging of the population and a lack of embracing free market solutions to lower prices. It’s tough to say if the American Healthcare Act will solve the latter problem because no one knows what the Senate bill will look like.

Besides consumers suffering from the expensive cost of healthcare, rent has also gotten more expensive. As you can see from the chart below, rent income has never had a higher share of GDP. After the housing bubble burst, the home ownership rate plummeted. These new home owners still need a place to live, so they moved into rental properties. The millennials have too much student loan debt to take out a mortgage, so they are also moving into rentals. A student loan can act like a mortgage for some people who take out loans which can get into the six figures and get paid off after 15 years unless they’re extended.

The question is what the end game is for this trend of rising rents which started in 1990 and started accelerating higher in 2009. Clearly rents will hit a ceiling at some point. Getting into the rental property business is great now because interest rates are low and rents are high. When interest rates rise and the next recession hits, I expect this bubble in rents to pop. It would be unprecedented to see rents rise even more, since they’re already at a record high.

Apple Boosted By Swiss Central Bank

As I have mentioned previously, Apple’s stock has had a big impact on the Nasdaq, Dow, and S&P 500 as its market cap is near $800 billion which is the largest in America. Besides Apple’s buybacks, the Swiss Central Bank has played a part in boosting Apple’s share price. The bank has purchased 3.9 million shares in Apple in the past quarter, making it the largest holding the bank has. The Swiss Central Bank has $80.4 billion in American stocks. This is manipulating U.S. stocks higher and shows no signs of stopping. I’m not sure how the Swiss Central Bank buying Apple stock solves the monetary problems Switzerland has. The situation can easily get out of control as Apple’s stock can increase far beyond its intrinsic value. Once that happens, a crash back down to fair value is inevitable.

Conclusion

The economy is on weak footing as bubbles in healthcare costs and rents cause pressure on the consumer’s disposable income. The rent bubble cannot keep increasing at the same rate because housing will become impossible to afford for many Americans. The stock market is being led higher by Apple which is being boosted by buybacks and the Swiss Central Bank. I expect the Swiss Central Bank to continue buying more Apple stock which may mean stocks continue higher for the rest of the year despite the high valuations.

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