Investment Contrarians

Are You Making More Money? Data Say Not Likely

By for Investment Contrarians |

Economic ForecastWhen making an economic forecast, whether it is for the global economy or a specific nation, one of the most fundamental inputs is the growth of wages for the average citizen. Since consumer demand supports so much of the modern economy, especially in the U.S., a lack of wage growth will certainly filter into a weaker overall economy.

While we have seen some improvements in the number of jobs created this past year, clearly this is not enough, as we have not seen any improvement in wages. My economic forecast for America in 2013 will continue to be muted, as real wages are actually declining, in addition to the global economy being extremely weak.

I was looking at the data from the Bureau of Labor Statistics and it reports that real wages, which take inflation into account, have fallen every month since February 2011 except one, in which real wages were flat. Over this period, my economic forecast for America continued to be lower than consensus, because there was no sustained increase in income. Without real wages growing, the wealth of the average citizen continues to decline.

America certainly cannot look to the global economy to help pull us out of the trough. In fact, a recent economic forecast on the global economy by the Organization for Economic Cooperation and Development (OECD) has also shown that it, too, has reduced expectations for growth.

The OECD now has an economic forecast that the global economy will grow 2.9% this year, versus an earlier estimate of 3.4%. The OECD has also drastically reduced next year’s economic forecast for the global economy to 3.4%, versus an earlier estimate of 4.2%. The OECD economic forecast for America was cut as well, for which the organization now estimates growth in 2013 of two percent, versus the earlier economic forecast of 2.6%. (Source: “OECD cuts global economic forecast over eurozone risks,” Reuters, November 26, 2012.)

In my opinion, the important thing when looking at any data point is the direction of revisions. When you see an economic forecast continually being revised downward, this is a sign that the underlying strength is much weaker than expected. Conversely, when the global economy is booming, we would normally see positive revisions.

The OECD points out that the eurozone is the biggest risk to the global economy in its economic forecast. When you combine a lack of growth in the global economy with declining real wages for American citizens and the looming fiscal cliff, the future appears to be quite difficult.

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