Strong Economy turns focus to War, Inflation
Peter Bernstein, Chief Economist, pbernstein@rcfecon.com, 312-431-1540 x1515
The latest RCF Economic Recovery Scorecard reached 112%, up from the previous month’s value of 111% and the fourth consecutive month above 100%. Eleven of our 16 metrics are fully recovered from the recession. Eleven improved last month including all six of our labor market measures, all of which are at least 90% recovered, with two more than 100% recovered. Only vehicle sales, which are affected by a host of special factors, remain well below their pre-recession level. With Covid now in the rearview mirror (hopefully!) and 2021Q4 real GDP 3.2% above its pre-recession level, attention has turned from the status of the recovery to inflation and the war in Ukraine.
With that in mind, beginning next month we will be publishing our Inflation Scorecard which tracks the various components of the consumer price index, and other inflation measures. RCF will continue to publish our Economic Recovery Scorecard tables but our focus will be on the outlook for inflation.
Notes and methodology: All data are seasonally adjusted monthly values. Variables 4 through 9, and 13 are data from February; all others are from January. Example calculation for economic variable #1, real income less government transfers fell 8.0% from its February 2020 value to its low point in April 2020. In the latest available report, the variable was 1.0% above its peak value. Therefore, it has recovered 112% of the loss. Data Sources: #1, 2, 3, 12, 13: Bureau of Economic Analysis; #4, 5, 6, 7, 8: Bureau of Labor Statistics; #9: U.S. Employment and Training Administration; #10: Federal Reserve; #11: Bureau of the Census; #14, 15: Bureau of the Census and U.S. Department of Housing and Urban Development, #16: National Association of Realtors.
Aggregate Real Wages and Salaries are above pre-recession level, but that’s not the whole story
The Scorecard shows that real wages and salaries are 130% recovered. Specifically, this metric fell 9.3% during the pandemic recession and are now 2.8% above that previous peak. That calculation might not square with other reports that workers’ wages are failing to keep up with inflation. The reason behind this apparent discrepancy is that the Scorecard metric is aggregate earnings across all workers as opposed to average earnings of individual workers. These two measures are shown in the chart below, where both are indexed so that their values in February 2020 = 100.0.
Both measures are now above 100 meaning they exceed their pre-recession level from February 2020. But their paths have been quite different. Total earnings fell sharply as Covid hit the nation, due to the large drop in employment. However, in the early months of the pandemic average earnings of the workers who were still employed increased, mainly because the job losses were concentrated in lower paying jobs that were no longer included in the average.
More recently, continued gains in employment have raised total earnings, but per worker earnings have declined in real terms as inflation has exceeded the increases in average worker pay. Over the last 12 months, average real earnings are down 3% while total real earnings are up 2.5%, due to the increase in the total number of people working.
From a macro perspective, the increase in total real earnings is a sign of substantial economic progress. But on an individual level, the drop in average real earnings shows that inflation is taking a toll on the standard of living of most workers. For this and other reasons, RCF is developing its Inflation Scorecard to track price changes across the economy.
Appendix – Recent History of Recovery Scorecard
Note: Historical data are often revised so comparisons with earlier RCF Scorecards may reflect the impact of revisions.
Monthly Recovery Percentages
