The economy continues to look stable, but the gap between two consumer confidence measures points to weaker wage gains and spending.

President Trump recently noted the strength in consumer confidence. While confidence levels among households are high, there is a substantial gap between two widely recognized measures: The Conference Board and the University of Michigan’s indices. The Conference Board’s measure is heavily weighted toward the labor market and the measure of hard-to-find jobs and easy-to-find jobs. The Michigan measure has more variables and has more weight on prices, price expectations, and, by implication, real income perceptions. This gap between the two provides insight into the labor market: Job creation is strong, but wage gains are weaker than normal given the unemployment level. Headline inflation suggests that real incomes are doing worse than the pace of job creation may suggest.

The difference between these two confidence measures shows how households perceive the flatness of the Philips curve — the relationship between the rate of inflation and the unemployment rate. The Michigan survey tracks how households feel about possible purchases, including vehicles, homes, and durables. The homes measure has declined as house prices and interest rates increased. As a result, the housing market remains sluggish. The auto measure also declined and, not surprisingly, auto sales have weakened. And more recently, the durables measure fell. Consumers are pleased with the availability of jobs, but they are not so happy about trends in their real incomes.

Manufacturing sheds workers

The Labor Department reported in early September that worker payrolls expanded by 201,000 in August and private-sector hourly wages grew 2.9% from a year earlier. The unemployment rate held at 3.9% for a second straight month. While the labor market report was broadly in line with expectations, there were two small variances.

First, not all sectors enjoyed job growth. The manufacturing sector’s employment dipped for the first time in a while. While the August decline was small, we wonder if this is an effect of the ongoing trade and tariff disputes. Secondly, wages rose more than expected. The increase caused an immediate uptick in interest rates. This reflects the concerns we mentioned earlier; markets will be ready to price in a more aggressive path for the Fed amid signs that wages are rising. Still, the wage gains were concentrated in one sector: trade. To start worrying about wage pressure, we would have to see evidence that wages are rising across the board, or at least in more sectors, especially since this sector — trade — has shown a lot of volatility in wages and employment levels in recent months.

State of the economy

Residential construction spending in the United States shows that the housing market is ceasing to make an important contribution to economic growth. Only spending on home renovations is still growing, reflecting the fact that households are no longer supporting an expansion in home construction. Because housing affordability is weak and incomes are not rising, people are spending more on renovating their existing homes.

The buoyancy of spending on renovation helps to explain retail employment, where home improvement stores are the sub-sector showing the fastest growth. Officially, it’s building materials and garden supply stores; think Home Depot and Lowe’s. It’s also one sector where competition from internet retailing is not quite so intense. This reinforces the point that we are not yet seeing widespread pressure on wages.

We see risks as asymmetric. It is possible that we are at the early stages of a capex and productivity growth phase, which would allow economic growth and wage growth to be strong without inflation rising and without the Fed needing to shift to a more aggressive path. That is possible, but unlikely. It’s more likely the economy is benefiting from fiscal stimulus, and that 2019 will bring either a slower pace of growth, as the stimulus disappears, or a more aggressive Fed, if growth stays strong.

Next: ECB and the inflation game

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The global economy is expected to enjoy relatively solid growth even as emerging markets tumble and the trade wars escalate.