Utilities More Than Double S&P 500 Returns Since February 1st

Utilities - Economic Review

Economic growth should be strong in 2019 based on the strength of the consumer as real wage growth is at a cyclical high. GDP growth might not be great in Q1. 

Even though wage growth has been strong, there was a scare from the government shutdown which curtailed spending. If the savings rate starts to fall because consumers are more confident, spending could spike. Global economic slowdown that has been centered in manufacturing lately is also putting a damper on growth. Europe and China have seen weakness which is impacting trade.

One of the best ways to measure if the consumer is in good shape is housing data. The spring selling season is about to start soon. I’m expecting improvements. On the other hand, auto sales have been weak. A secular downtrend is starting because of the expanse of micro-mobility and ridesharing. Each year, the percentage of teens getting their license declines.

As you can see from the chart below, in February real wage growth deflated by headline CPI was 2.3% which hit a cycle high. 

Average hourly earnings deflated by core CPI was 1.4% which is the highest growth since early in the cycle. The decline in energy prices and the tight labor market are great for workers. This information should inspire confidence in GDP growth and firms affected by consumer spending. Firms with a large portion of their expenses going to labor will see margins tick lower. Firms that have energy as a big expense will be helped. If real wage growth is higher than in 2018, it’s hard to see GDP growth being much lower.

(Click on image to enlarge)

Utilities - Lower Pay Equals Higher Wage Growth

Lower-income workers usually see the most pay growth at the end of the cycle. Their job creation is the most volatile as they are more likely to get fired during recessions and firms are more likely to need them when they are growing. During recessions and weak points in the economy, upper-income workers are less likely to lose their jobs and they get higher pay growth.

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