Charts of the Week: The Jobs & Income Disconnect

One of the complexities of using a data driven approach on government data is the revisions. For those who follow the savings rate closely, (because it’s the difference between two heavily revised datasets), it has the illustrious track record of some shockingly large revisions. If you want to geek out, check out the research from the Philadelphia Fed that compares original releases to the final tallies. In 1979, the original estimate of the savings rate was 3.3%....it turned out to be almost 9%. Why? Doug Lee, a long- time economist and friend used to tell me that “the government always finds income after the fact.” We probably have better data collection methods than we did in the ‘70s, but this brings me to my current point: the large downward revision we just saw in payrolls were oddly matched by an equally large upward revision to income.

The revisions cemented a divergence in trend, and this is very odd. Around 80% of the time, Real GDI and Jobs accelerate or decelerate together. Is there information in the tails? It seems so. The 10% of the time our current situation has occurred – Real GDI accelerating, but jobs decelerating – it has produced historically above average returns for the market over the next year. The opposite produced… well, the opposite.

It’s not just the divergence in trend that’s extreme this time around. It’s also the magnitude of the difference between the growth rates. Real GDI is growing at roughly 3.5%, with jobs growing at just 1.7%. Looking at the data from the ‘80s, this is a top decile disconnect in favor of income over jobs. Again, there seems to be a meaningful pattern here historically: The bigger the disconnect in favor of income, the higher the market returns tend to be over the following year.

Why? Turns out it is yet another positive indicator for earnings growth. Despite obvious headwinds, from a data perspective, we seem to be racking up indicators that suggest earnings growth is more durable than many expect. While we’re all concerned about inflation, the Fed, taxes, and debt – it is earnings growth that powers secular bull markets. And right now, it looks bullish.

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