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Why A Fed Rate Hike Will Almost Certainly Lead To A Recession

It was back in March when we were delighted to report that we had finally solved "The Mystery Of America's Missing Wage Growth" - "mystery" because while those employees in positions of power had been abusing the availability heuristic for years, and extrapolating their own wage growth to the broader population, the reality was what we had said 5 years ago: there is simply no notable wage growth for the vast majority of the US population, period, and certainly none even remotely close to the Fed's preferred threshold of 4.5% to justify a "mission accomplished" banner.

As per our findings, this was easily explained: there was indeed a surge in wages... for supervisory workers: bosses, managers, shift leaders and the like, while non-supervisory workers had been getting the short end of the stick since 2008. The problem: non-supervisory workers account for 82% of all workers, and unless their wages also rebound, there is no hope that the US economy can even grow at anything resembling historical levels ever again.

Unfortunately, with the bulk of US labor growth focused on such sectors as bartenders and waiters, whose ranks have increase in 64 of the past 65 months...

... there simply can not be broad wage growth period.

So what does this mean for wage growth? Well, the headline number as we showed earlier is going nowhere:

 

But if the above is bad, it gets much worse when looking at the ugly truth which few dare to touch, and which is revealed when looking at average hourly earnings of production and non-supervisory workers (table B-8). The chart below shows why a Fed rate hike hike in the coming months virtually assures a recession: in July, wages for non-supervisory workers failed to rise once again, increasing by a paltry 1.8% Y/Y after peaking at 2.0% in late 2014. Worse, the current trend suggest the record lows of 1.3% will be revisited in the coming months.

 

And while a Fed rate hike would guarantee that wages, or as they are better known in corporate America "variable costs" for 4 out of 5 workers tumble as corporations hunker down in an attempt to preserve margins in a rising interest rate environment, not everyone will be screwed: while wages for 82% of US workers are rapidly sliding once more, supervisors have rarely had it better.

In fact, in July average hourly earnings for this group soared from 2.3% Y/Y in June to 3.5% in July, just shy of the recent all time high of 3.9%  in April, and the record highs hit in 2012.

It is these 18% of US workers that have benefited from the surge in the stock market. Everyone else: toug luck, and it is about to get even tougher when Yellen starts the rate-hikes cycle, because if middle-America though it had it bad with 7 years of ZIRP and QE which while benefiting the 1% did not directly harm the 99%, then just wait for the real pain once corporations slam wages for "everyone else", the moment the Fed begins rising rates, however transitory. The good news is that any such rate hike cycle will be all too brief, and lead inevitably to QE4, 5 and so on.