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No, This Is NOT the '90s Economy Again

With only one more report left, 2014 is shaping up to be the best year for job creation since 1999. Predictably enough, last week’s strong numbers (321,000 jobs added) inspired some commentators to suggest that the report was not just good news, but really good news, putting the cap on a record-breaking 50 straight months of job growth since the doom and gloom of 2009. The word “blockbuster” was used frequently.

Even more exciting was the new evidence of wage growth in the report. For the past few years, as jobs have steadily increased, the absence of wage growth has assumed a central place in whatever constitutes our national conversation about all things economic. Anemic wage growth was cited as the primary reason why mid-term election voters were overwhelmingly negative about “the economy” even as job growth would suggest they should not be.

So, yes, last week’s report was fairly positive, almost across the board. But let’s keep some perspective. Is 2015, as some are now predicting, promising a return to a 1990s-style robust labor market, with substantial wage growth and maybe, just maybe some inflation?

Probably not. At least not for a long while yet.

Statistically, with a labor force that the Bureau of Labor Statistics counts at 156 million, a few hundred thousand jobs created a month is not quite as large a number as it seems. And because of the low “labor force participation rate,” we would need two and a half years of job creation at this November rate’s before we got back to where the United States was in terms of jobs in 2007, and three and half years of such reports before we approximated the labor market of the late 1990s, at least according to an analysis done by the Center for Economic and Policy Research.

And while the surge in wage growth, to the tune of 0.4 percent in one month alone (for those playing along at home, that would be nearly 5 percent annualized), was eye-catching, it was not quite what it seemed.

First, overall wages have been so stagnant that one stellar month only brings the multi-year trend up slightly. And as others, such as Derek Thompson at the Atlantic have pointed out, incomes for millennials for instance are still down from their peak, to the tune of 10 percent from 2007 in real terms.

The larger issue, however, is that the entire debate over jobs, wages, and incomes is being framed badly. To ask whether the “job market has turned a corner” or whether “wages are rising” is to ask an inherently unanswerable question, or rather to ask a question whose answer will inevitably be only partly right at best and hence partly wrong.

The reason is that “wages” and “jobs” are statistical categories that treat the entire economic system as one big unit, when in fact it is not and is arguably becoming less so. The economic system may be unitary, but that only serves to mask massive variations underneath.

It’s not just that there is considerable variation in one’s employment prospects depending on age, race, demographics and especially education level. Those are vital. A college-educated woman has substantially better job opportunities than a Hispanic male with only a high-school diploma . Houston and Detroit are both metropolitan areas in the United States, but in terms of how they measure economically, they are about as similar as Nigeria and Norway.

What’s equally striking, however, is that as we move ever further from the financial crisis of 2008-2009, we move ever more into the economic realities of today, and those are much less amenable to generalizations. Now, the differences between say Silicon Valley and California’s Central Valley, or between the metro-Washington area and West Virginia, are starker than ever. A draught-ridden agricultural California stands in contrast to a booming (maybe too booming…) tech industry ($40 billion for Uber anyone). Also stark is the gap between the economic prospects of those connected to industries and segments that are booming and those that are not.

Technology and high-tech services, to higher-end retail, entertainment and healthcare services that require advanced degrees such as nursing, all of those are seeing wage increases and job openings. Seasonal retail (which is strong this time of year and then sees major contraction in January and February) as well as jobs like healthcare orderlies and fast-food and casual dining have seen none of that. And with moves such as Amazon installing robots to streamline the logistics of its massive warehouses and retrieve items, the trend for such jobs in the future appears even more grim. None of these vagaries are apparent in the headline numbers, and never will be. That has always been true to some extent. But for much of the 20th century there was a more stable and coherent middle-class and working class.

Even “income” and “wages” cannot capture the underlying dynamics of a fluid system. The past year has seen increased political and public attention to inequality of income and wages in the United States and indeed throughout the world. Hence the moves towards raising the minimum wage in the United States to as much as $15 an hour, which even the heavily Republican electorate in November’s midterms seemed to support. But “income” and “wages” are only half the equation of having a sustainable economic life. The other component is costs, and on that score, we have few measures that are adequate.

Many, many Americans are concerned about stagnant wages. But more to the point, they are concerned about whether their income can meet their needs. If everyone’s income stayed about the same but the costs of living went down, it wouldn’t matter if incomes were stagnant – or at least it shouldn’t. There is substantial evidence that many of life’s necessities are getting either cheaper or not getting any more expensive. That is notable true now with the price of energy and especially gasoline, as crude oil continues to sink and now under $70 a barrel.

So debating about “wages” as the primary criteria of economic success and stability is far too simplistic a debate, unless it is coupled with an analysis of costs of living. There, the trends are largely toward lower costs of almost everything, though healthcare remains a question mark and higher education is certainly getting costlier just as it is becoming more imperative. This may be the cusp, however, with a coming wave on on-line education and health care technology perhaps about to disrupt established players and push costs lower. The Census Bureau does do extensive work about living costs, but this data lags the monthly numbers that frame our discussions.

Even that large and detailed database, however, does not and cannot go down the level of individual lives and families and the complicated nexus of income and costs and needs and desires.

So we are left with these heated debates and, as we have seen from both the November elections and the past presidential elections, politically consequential numbers. We also have a commentariat that is not prone to too much subtlety, perhaps because most people are not as well. Hence labeling jobs reports “blockbusters” or “disappointments” when the best and worst of them – absent a real crisis such as late 2008 and into 2009 – have ample amounts of both.

The only thing that is clear about employment and wages, therefore, is the following: Jobs in the United States are relatively plentiful but well-paying jobs are less so. And you’d better pick a job in a rising rather than a declining sector, or you’re screwed. Wages are booming for jobs that are attached to the evolving technology-infused economy of tomorrow; they are not booming and may be contracting for anything that can be done by almost anyone. As a result, “wages” may rise somewhat, but only because they are rising well above inflation for some and not much in real terms for most.

Nothing that Congress, the White House, the Federal Reserve or anyone in Washington does in the next year will alter the above statements. For the next two years, the sheer complexity or winners, losers and all those in between will give all sides of these debates of whether we are doing well or badly and whether government is a boon or a bane ample fodder. And meanwhile, 320 million Americans, along with billions of others throughout the world, will grapple with these changes and find that the stories being told about them rarely capture the lives they are living.

This article originally appeared on Politico Magazine.

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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Author’s disclaimer: The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

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