Submitted by Joe Carson, fomer Chief Economist & Director of Global Economic Research for Alliance Bernstein
The abrupt drop in average hourly earnings in December to a 3% gain, 50 basis points below the run-rate of the past year, is as much of a surprise as it is a puzzle. How can the wage data show a one-month plunge in earnings growth when the other parts of the labor report showed steady gains in new hiring (+145,000 in December) and no change in the unemployment rate (3.5%)? The answer could be a large drop in incentive or commission income due to soft holiday sales at a number of business establishments in retail and wholesale trade.
Earnings in the payroll employment report not only include regular wage and pay increases but also monthly bonuses and commission income tied to workers sales performance. It’s the latter component of earnings that might explain the sharp drop-off in the rate of earnings growth.
December’s data on wages show an exceptionally large deceleration in the retail and wholesale trade sectors. Wages in the two trade sectors combined posted an annual gain of 2.9%, off sharply from the 4.5% gain recorded one year earlier.
Payrolls of retail and wholesale trade account for nearly 20% of total payroll employment so the 160 basis points drop – from 4.5% to 2.9% in wage growth – would account for more than the 50 basis points deceleration – from 3.5% to 3.0% -in average hourly earnings.
The sharp slowdown in earnings growth in retail and wholesale trade occurred even though these businesses added 50,000 new workers in December. The addition of new workers suggests that these companies were not looking to cut labor costs in December so that raises the possibility that the reduction is earnings growth came from other parts of labor compensation.
Combined, November retail and wholesale sales were up a mere 2% from year ago levels, roughly half of the 2018 performance. Yet, sales at many of the high-profile retail establishments, such as general merchandise and clothing stores posted a decline of 1% -well off the 4% gain of one year earlier.
With reduced growth in sales, and declines in some areas, odds are relatively high that incentive or commission-base income dropped sharply in 2019 versus what was paid in 2018. None of this is meant to downplay the importance of commission income, only to point out its “lumpiness” and its sensitivity to sales performances.
Investors should be also mindful that sales are a good proxy for revenue growth -and the soft sales reports should be seen as a harbinger of weak Q4 profits in a number of businesses as well.