By Garrick Brown, Vice President of Retail Research, Americas
If someone were to ask you, “What is the percent of Americans who haven’t seen wage growth in the past year?” or even “What is the percent of Americans who haven’t seen wage growth over the past twenty years?” what would your answer be?
I speak at a lot of events—usually to some pretty educated people when it comes to economics. When I have posed these very same questions to audiences I typically ask for a show of hands. Sure, there are some know-it-alls in the audience that I usually try to avoid before the “great reveal.” But for the most part I see a lot of raised hands when we are talking about 30% or 40%. Lately, when I pose these same questions to laypeople, their responses are typically higher, with 50% or even 60% responses not uncommon.
This hasn’t been that much of a surprise. Let’s face it, if you were doing nothing but listening to politicians (and the media covering them) in this election year, you would think that, at best, only the top 20% of earners were doing better today and that the entire economy is stagnant. Whether the political narrative has come from Donald Trump on the right or Bernie Sanders (and now Hillary Clinton) on the left, the storyline of a declining middle class has been a favorite this year and it will continue to be for the remaining two months of the presidential campaign.
There is only one problem with it. It’s not all that true. There is no doubt that in this latest recovery that lower and middle income workers have been the last to feel any relief. Nor is there any doubt that wage growth for these groups over the past 20 years has been far outpaced by that of earners at the top end of the scale but this is not a phenomenon that has been limited to the investor class or the top 1%. While that group has done incredibly well, wage growth actually has been consistently strong in the post-recession era for a lot more than just the top 1%, or even the top 10%. But it was overwhelmingly focused on higher wage earners, with hourly gains not showing more than a 2% wage growth level until recently.
But something happened starting about two years ago… overall wage growth started picking up substantially. In fact, it has been downright robust over the past year, particularly if you factor in inflation (which you should).
The Atlanta Federal Reserve’s Hourly Wage Growth Tracker Report was released a few days ago and showed a 3.4% jump in median hourly wages over the past year. While it is true that this is not back to the 3.4% to 4.1% growth rates recorded between 2004 and 2007, it should be noted that the Consumer Price Index rate today is at just 0.8%. It consistently measured above the 3.0% range during those years. This is critical because this is the measure of inflation.
So real wage growth over the past year has actually been far stronger than what workers experienced during those years (2004 to 2007) at the peak of the last economic growth cycle. Sure, back then hourly workers may have had periods of time where their paychecks were growing at a rate of 4.0% annually, but throw in inflation and that growth was back to the 1.0% or less level. With inflation currently at just 0.8%, the current wage growth of 3.4% actually measures some real progress for lower earning workers. And those numbers have actually been pretty darn good for the past two years.
Now this is not to say that growth hasn’t remained weak or even non-existent for a few key categories, primarily low-paying manufacturing and retail jobs. The Fed actually breaks out their wage growth numbers by percentile. But before I delve into that, let me remind you that these numbers reflect hourly earners only. So this already excludes salary workers. Because its focus is on hourly employees, this data is already is looking at the nation’s lowest earners. That being said, while that 3.4% growth rate reflects the median, the upper 75th percentile of hourly workers actually saw annual growth of 14.6%. Unfortunately, the lowest 25th percentile of hourly workers has seen a decline of -2.1% (look at chart two on this page).
Here is what is interesting about these statistics; look at the historical trend—what is happening today is actually nothing new.
The top 75th percentile of hourly workers has actually been seeing consistent increases in the 10% to 15% range going back to 1997. This group hit a low-water mark in October 2010 of 10.2%, but otherwise their numbers have been consistently decent. Unfortunately, the news has been just as consistently bad for the lowest hourly earners. You have to go back to 2000 to find a 0.0% growth rate for the lowest 25th percentile. Other than that, the numbers have been consistently negative for this group going back to 1997. The current negative wage growth for the lowest earners is less than what was being recorded in 2009 and 2010, but it is clear that this group has been getting the short end of the stick for going on at least twenty years. However, look at chart 3… that group that is experiencing zero wage growth comes out to about 13.6% of all hourly wage earners. That is not a good number, but it is down from the July 2012 reading of 17.2%. Still, it’s safe to say that roughly 10% of all Americans haven’t seen any wage growth going back almost 20 years.
Clearly there is real reason for the appeal of the current political message being touted by both campaigns when it comes to “the decline of the middle class” though what has really happened has been a true decline in the state of the working poor. Of course, American politicians rarely win elections talking about the fate of the poor in this country. They do win, however, when talking about the middle class. And the middle class, especially middle class hourly wage workers were late to feel any improvement in the current growth cycle… so their embrace of this message makes sense from the perspective of pent up frustration, if not rage.
Now I am not looking to argue with anyone over whether the American middle class has shrunk over the past 20 years. I don’t dispute skyrocketing healthcare and housing costs have played a role in squeezing the middle class over the past few decades. Nor do I even argue that wage growth couldn’t be a little better. What I am saying here is that the numbers are nowhere near as bad as the picture that has been painted. So back to that question, “What is the percent of Americans who haven’t seen wage growth over the past twenty years?” The answer is not the apocalyptic 30%, 40%, 50% or even 60%. It’s a little over 10%. And by the way, that problem could be fixed easily enough by creating a livable minimum wage that regularly increased (say every four years) based on CPI adjustments. But that would be far too easy to do and cheat all of our politicians out of the opportunity to grandstand every few years as economic imbalances naturally grow greater over the course of an economic cycle. But what do I know?
By the way, one of the best bits of commentary that I have seen over the past couple of weeks was a bit of commentary from Joe Kefauver that ran in Chain Store Age: The False Fight over Job Loss. It is a great piece focusing a little more on the issue of automation and how it has impacted jobs, but it is essentially the same argument that I am making.
One last thing about jobs; the news broke this morning that trade school ITT was shutting down, laying off 8,000 employees and largely leaving its students in limbo. This one has more to do with regulatory scrutiny than anything else. But you should note that the for-profit education sector across the board has been struggling as of late with falling enrollment. While some of this may be due to regulatory scrutiny, the reality is that this sector thrives when the job market is weak. It tends to struggle when the job market is strong.
Now on to some other pertinent retail news…
Our friends at Statista just did a study that suggests there may be hope for the bricks-and-mortar retail book store industry yet. In their article, E-Books are No Match for Printed Books (Yet), they break out some data from a recent PEW Research Center report that finds that 73% of Americans read a book last year and the vast majority of them read actual books, as opposed to books on their smartphones. Could what is left of the bookstore sector stabilize in much the same way consumer electronics seemingly has? I would argue… maybe. Barnes & Noble has certainly improved their performance by increasing the number of non-book items for sale in their stores and adding more food. Meanwhile, the independents largely have survived due to the loyalty of their hardcore bibliophile customers. Could happen, but there will be more contraction ahead before we get there.
Speaking of contraction, the great folks at Credit Intel put out an analysis of Sears late last week that I thought excellent. These guys do a great job of tracking the financial health of retailers and what I like about them more than most other analysis firms is that they dig deeper than just EBITDA. If I have a beef with Wall Street analysis firms it is that their analysis often isn’t very deep when it comes to understanding underlying consumer fundamentals and certainly many Street firms don’t seem to get the real estate angle at all. However, my buddy Tony Lobosco and his crew over there do and their stuff is pretty invaluable.
Last Thursday, Sears announced $300 million in additional financing in the form of a second lien loan on inventory and receivables with ESL as the lender. They reportedly have the potential to increase this by another $200 million if they find interested parties. Their challenge, however, is that they have averaged $1.2 billion in cash burn in each of the last three quarters and according to the Credit Intel analysis, they will likely have to come up with another billion in financing to get through the first half of the year. Moves to monetize their real estate might get them there, and they reportedly have been looking for parties interested in purchasing some of their most valuable assets, including the Kenmore, Craftsman and Die Hard brands. No doubt the sale of any of these could help get them there, but the reality is that Sears needs to find a way to stop sliding sales and they need to find a way to do it yesterday. To say that this holiday shopping season is a “do or die” season for them may be an understatement.
In the other “do or die” category, Aeropostale bounced back from the edge of destruction. Increasingly bankruptcy has become a roach motel of sorts for retailers… “You check in, but you don’t check out.” Certainly, this is what happened with Sports Authority. There were simply no takers to buy them out and this is a brand that I am convinced would have survived the same bankruptcy just a couple of years ago. Aeropostale had hoped to just close about 160 stores and re-emerge, but its primary creditor had been pushing for total liquidation. It still might happen, but a consortium consisting of landlords Simon and GGP, with liquidators Gordon Brothers and Hilco along with licensing firm Authentic Brands have stepped in with a $243.3 million bid. If approved next Monday, the chain will survive with about 229 locations. Regardless, we are still looking at somewhere in the neighborhood of 500 closures and it is not clear what kind of impact landlords Simon and GGP will have on the real estate side of this equation… assuming the deal is approved.
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This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing firstname.lastname@example.org.
Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.