Global Daily – Why the Fed should watch the labour share of income

by: Bill Diviney , Aline Schuiling

US Macro: What the labour share may tell us about slack – In explaining why wage growth has failed to pick up more significantly, despite the historically low unemployment rate, a common riposte is that low productivity growth is the main driver. Productivity growth is indeed lower than it has been historically, and higher productivity growth will be needed for sustained wage growth over the longer term. Indeed, in his post-FOMC press conference two weeks ago, Chair Powell responded to a question on wage growth in exactly such terms. However, low productivity growth cannot explain the entire story, because it is not only wage growth that is subdued, but also labour’s income share of national output (defined in the US as total employee and proprietor compensation as a percentage of gross value added). This has seen a structural decline since the early 2000s from a 60-63% range to a remarkably stable 56-57% range in the post-crisis period, with little sign of any cyclical upswing (as of Q1 18, it is stuck at 56.6%). Were the labour market truly as tight as it appears, labour should have the theoretical bargaining power to get a bigger piece of ‘the pie’, even if low productivity growth means that pie is growing at a slower pace than it was previously. Alongside broader structural factors (including lower trade union membership, and globalisation), the lack of even a cyclical pickup in the labour share may well mean that there remains some degree of slack in the labour market. (Bill Diviney)

Euro Macro: Bank lending grows vigorously, underlining robust growth in domestic demand – The ECB published its report on monetary developments in the euro area in May today. It shows that bank lending to companies and households is flourishing. The low levels of interest rates and robust levels of growth in consumption and investment has resulted in a rise in the monthly flow (adjusted for sales and securitisation) in loans. Loans to households expanded by EUR 16.5bn in May, up from EUR 13.1bn in April, while flow in loans to non-financial companies increased to EUR 22.2bn, up from EUR 11.1bn. As a result the annual growth rate increased to 3.6% from 3.3% for loans to companies, while it stabilised at 2.9% for loans to households, which is the highest levels since early 2009 for both series. As we have mentioned in our Global Daily Insights earlier this week, we have recently revised our growth outlook for the eurozone somewhat lower as we expect the weakness in exports and industrial production, which started at the start of the year, to last somewhat longer, whereas we still expect robust growth in final domestic demand. Indeed, today’s strong data for bank lending seems to confirm the view that strength in domestic demand will cushion the slowdown in exports and keep total GDP growth at levels somewhat above the trend growth in the coming quarters. (Aline Schuiling)