Now that we have the consumer inflation number for August, let’s take a look at real wages and income for ordinary workers.

In the jobs report last Friday, we learned that both average hourly earnings and aggregate payrolls for nonsupervisory workers increased 0.4% in August. Yesterday we learned that consumer inflation also rose 0.4%, so unsurprisingly growth in both real average wages and aggregate payrolls rounded to zero.

First, here is the historical pre-pandemic graph of real average hourly wages, both YoY (red, left scale) and in absolute terms (blue, right scale). As you can see, a decline in YoY real wages has been a decent - though far from perfect - antecedent to recessions:

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The metric is badly complicated by gyrations in the work force itself. In particular, from the early 1970s through the mid-1990s, with the entry of the huge Baby Boom generation, as well as the majority of women, into the workforce, real wages underwent a generation of depression. Once entry of the last Boomer and woman was digested, real wages started rising again. Even during that period, when wages declined more than trend, it was a warning signal.

Now, here is the post-pandemic record:

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Somewhat with fits and starts, real average hourly wages have been rising since June 2022, the inflection point when gas prices fell from $5 to $3/gallon, and the supply chain un-kinked. 

The increase in real average wages stands at +1% YoY, with no significant sign of decoration at this point. 

The much more reliable indicator is that of real aggregate nonsupervisory payrolls. This tells us how much the vast majority of consumers have to spend. When it rolls over, consumers pull back, and a recession almost always begins.

Here is the historical, pre-pandemic record:

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This indicator is almost flawless. If real aggregate payrolls are rising (blue line) the economy is not in recession. With one exception (2002-03), shortly after it peaks, a recession has always begun, typically within two months of when the YoY% change crosses the zero line (red).

Post-pandemic, this indicator has held up as well, with several periods of weakness (late 2022, the beginning of 2024) but never crossing the zero line:

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Currently YoY growth is at 2%.

Finally, as the below graph, normed to 100 as of this March shows, we appear to have entered our third period of weakness in real aggregate payrolls (thick, red line):

(Click on image to enlarge)

These have risen only 0.3% in the five subsequent months, for an annual rate of 0.7%. Meanwhile real average hourly wages (thin, orange line) have increased 0.4%.

It would be wrong to project either of these forward, since needless to say, they don’t forecast their own future trajectory. What we can say is that, if weak job growth translates to weaker nominal wage growth, and if tariffs and the weaker US$ result in higher inflation, real aggregate payrolls could cross the zero threshold, signaling recession, by early next year.

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