Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Minyan Mailbag: Profits and the Consumer Part II


The net result is that the 'cash' income people need to make their mortgage payments and fill up their gas tanks is now the smallest share to personal 'income' in postwar history.

Editor's Note: This is a follow up to Profits and the Consumer, 9/6/2006


Thanks for presenting the exchange between yourself and Stephanie.

A great question to ponder, especially at this point in the cycle: Will employees be able to extract wage increases from their employers? You both presented some interesting thoughts as to why this may not happen and I happen to agree (mean reversion of profit margins and global wage arbitrage).

My thoughts are more along the lines of what if they do receive increased compensation? We know, in real terms, wages are sub par when compared to previous cycles. Let's throw another component into the mix: Medical costs. For the last three years, employers of all types of businesses have been passing some, if not all, of the price increases onto the employee. From personal experience, in the three firms I have worked for in the past three years, each has passed medical cost increases to the employee where none existed before. This was between $20-60 a month in my case and I am single with no dependants. From people I know or have come across who have a family the costs are much higher.

I have not come across any data to back this up but I would imagine that even a decent size wage increase would only cover the medical costs incurred over the last few years (actual costs vs. CPI medical?). This certainly will not be a replacement for MEW and the massive mortgage resets coming in the next two years. Additionally, if we continue to see medical costs rising at recent yearly rates (working class subsidizing the baby boomers?), these wage increases will become neutralized in short order.

Minyan Mike


You are making some excellent points. You are right, companies not willing to swallow the costs of medical inflation have passed those costs directly to employees. Though it has the impact of a pay cut, it (employee net paycheck declined) does not appear in the wage data. Also, since companies now have to put stock options compensation on their income statement, they started to lower the stock options compensation, thus the overall income is dropping at a faster rate than we've seen in the numbers. I've also passed your comments on to Stephanie.



I think this medical cost point is a very important one which doesn't often get discussed. As I mentioned at Minyans In the Mountains 3, there has actually been a secular decline in wages as a share of total employee compensation. This is, wages have been increasingly 'replaced' by benefits (medical included). This trend has accelerated in recent years because employers have been forking over so much for medical benefits that they offset that increased burden by holding back wage gains. Only recently have employers started to pass those medical costs along to workers and as they have done so, they still haven't increased the wage pay out. So the net result is that the 'cash' income people need to make their mortgage payments and fill up their gas tanks (still no way to do that with benefits, as far as I know!) is now the smallest share to personal 'income' in postwar history.

This ugly reality will be revealed when MEW goes away. That's when everyone will realize that the headline 'income' numbers make the consumer situation look a heck of a lot better than it really is. Nondiscretionary outlays (food, energy, debt service) are now their highest share of total spending since 1980. Meanwhile, the cash income necessary to finance them is the lowest share of personal 'income' in postwar history. Not good.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos