Rise of the Living Wage
Wages, economic growth, and inflation are running in dead heat to see if your buying power increases or declines this year.
The U. S. economy has bounced back from its early pandemic downturn remarkably.
The economy, as measured by Gross Domestic Product, jumped 1.7 percent in the fourth quarter of 2021 to finish the year up 5.7 percent, according to the Department of Commerce. That is the largest increase since 1984.
Wages have been rising along with the robust economy.
The Employment Cost Index, which measures wages and benefits, shows that compensation increased 4.5 percent in 2021. That is the fastest increase in the two decades.
The main reason wages are increasing is the labor shortage. For two decades wages for the lowest paying jobs have been stagnant.
The lack of workers for low-paying and entry-level positions has turned the tables. Now, workers have the leverage to seek higher pay.
Continued Wage Increases
Employers are budgeting for wage increases of 3.9 percent this year, according to a November survey by the Conference Board.
“We’re going to continue to see pretty strong wage growth this year,” Erik Lundh, Conference Board economist told Fortune. “It’s not going away,”
Keeping Up With Inflation
Having more money in your paycheck is only part of getting ahead.
You are losing ground if what you earn does not keep up with or surpass your cost of living.
“Overall wage growth, on a nominal basis, is still pretty strong,” Omair Sharif, the founder of Inflation Insights, told the New York Times. “The downside is that inflation is eating away at all of these nominal gains.”
Supply chain problems coupled with increased consumer demand have led to rising prices. The administration has enacted measures to relieve pressure on the supply chain. However, the Federal Reserve, through interest rate hikes, has the primary tools for bringing demand and prices down.
The Fed has signaled it will begin a round of interest rate hikes in March. Most economists expect several more rate hikes throughout the year.
Increased wages can lead to increased prices. That is because the cost of producing goods increases. However, most economists cite supply chain problems and a shortage of workers as the reason for inflation.
“I don’t think it has been the primary driver of inflation in 2021. A lot of people are pointing at wages and saying, ‘Look, it’s driving inflation.’ There’s a lot of other things that were happening last year that were responsible,” Lundh said.
“I don’t think we’re in a wage-price spiral point yet—although it’s not very far off.”
Morgan Stanely’s View of New Normal
This year may be the beginning of a post-pandemic new normal, according to many investment firms and health officials. Foremost in that view is Investment Banking’s Morgan Stanley.
“By most counts, 2022 will be a critical year in which the imbalances wrought by the pandemic will likely begin to resolve and the business cycle normalizes,” writes Morgan’s Lisa Shalett, chief investment officer for wealth management.
Shalett cautions that “normalization” does not mean 2019’s normal.
Hotter / Shorter Business Cycle
The business cycle will shift into overdrive powered by higher economic growth and higher interest rates, says Shalett.
If she is right, you will not be able to lean back on highly capitalized growth companies that padded many portfolios the last couple of years.
Morgan sees four trends emerging this year.
Innovation. Many companies were forced to innovate to maneuver around pandemic roadblocks. Shalett argues that the result was an “explosion” in investment and start-ups.
Domestic Sourcing. Supply chain problems have led more companies to source domestically and regionally.
That trend was already underway prior to the pandemic.
A Thomasnet survey published last month revealed that 83 percent of U. S. manufacturers are planning to add North American companies to their supply chain this year. That is up almost 30 percent for the 2020 survey.
Labor Market. Shalett cautions that rising wages may push consumer prices higher (see above).
Decarbonization. Shalett sees fuel prices continuing to rise which would add to inflation.
Shalett says these trends will result in growth and interest rates continuing to rise.
“Thus, when it comes to retooling investment portfolios for 2022,” Shalett advises, “the focus should be on the many ‘technology takers’—companies likely to drive increased tech adoption—not the few technology makers.”
In addition, Shalett contends investors need to take a more active part in their portfolio management.
“Focus instead on security selection to sift for potential winners,” says Shalett. “Key to all this will be more balanced allocations—securities based in the U.S. versus the rest of world, growth- versus value-style stocks, cyclicals versus defensives, mega-caps versus small- and mid-caps, and active management versus passive exposures.”
Battling Budget Blues
Most Americans feel their financial situation will stay the same or decline, according to a recent survey by Bankrate.
According to that survey, 26 percent felt their economic situation will decline. In addition, 42 percent see their financial status staying the same.
The reason for the gloomy outlook? Inflation.
“Inflation worries have dragged consumer confidence to a decade low and is the top reason Americans don’t expect their finances to improve, and particularly to get worse,” Bankrate Chief Financial Analyst Greg McBride reports. “This feeling goes far beyond gas prices, as inflation has broadened out and consumers see higher prices at every turn.”
Most of those who see their financial situation declining this year (70 percent) cited inflation as the main culprit.
The consumer price index (CPI) from December 2020 to December 2021 reached 7 percent, according to the U. S. Bureau of Labor Statistics. That is the largest year-to-year increase since 1981.
Controlling Your Financial Fears
There are ways to deal with your financial stress.
- Bottling things up inside builds the pressure. You need to talk to someone about your stress. The person you talk to does not have to have answers. You just need someone who will let you get it all out. Your significant other is a good person to start with.
- Next, you need a plan of action, once you have cleansed your financial soul.
- Identify your sources of income and your expenses with emphasis on debts.
- Locate your problem. You may have too much credit card debt, high-interest consumer loans, or you may be spending too much on unnecessary items.
- Attack the problem. Your solution may be to get a second job, renegotiate debt or cut spending.
- Establish a budget. This should cover living expenses with some extra for debt reduction and building an emergency fund.
Take a deep breath. Financial stress too will pass – if you take control of your thinking, care for your health and face your fears.
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Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird.
He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King.
Max lives in Springfield, MO with his wife Karen and their two cats. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.