Conclusion: The tea leaves from early State budget battles continue to support our view that negative growth in State and local government employment and/or employee income will be a drag on the economy in 2H11 and beyond. In addition, we refresh our intermediate-term Consumption Cannonball thesis below.
The following chart comes by way of our Healthcare team, which has been closely monitoring the progression in State & municipal budget battles to ascertain their impact on consumption growth throughout the broader economy. If there is one key call-out to make, it’s that Labor Unions are growing financially weaker at an accelerating pace – meaning that their power in negotiating with the many newfound, fiscally hawkish State legislatures grows increasingly limited.
The key takeaway here as it relates to the ongoing budget battles playing out across the nation is that State and local government employees, which are highly unionized relative to their private sector counterparts (36% vs. 15%), are negotiating from a position of marginal weakness. That means they’ll likely have to cave in to legislative demands to limit collective bargaining and front more of their incomes to help pay for burgeoning healthcare costs, as the threat of outright termination is as strong as it has been in many, many years.
Any threat to State and local government employee compensation is negative for aggregate household consumption growth – either through higher savings rates or lost wages resulting from layoffs – particularly given that they are generally compensated at higher rate relative to private sector employees.
Per a December report out of the BLS, wages and salaries for State & local government employees averaged $26.25 per hour vs. $19.68 per hour for private sector workers. In addition, State & local government employee benefits outpace those received by private sector employees by $5.65 per hour worked ($13.85 vs. $8.20). A recent study by USA Today found this to be true in 41 States (including D.C.).
All told, while the recent “successes” in negotiating with labor unions is positive for the financial health of States like NY and WI* (pending judge approval), successful negotiations with labor unions on a national scale will more than likely produce a drag on near-term consumption growth – particularly in the back half of the year.
Replacing this demand will have to come from a commensurate pickup in private sector employment and/or wage growth – two things we don’t see happening in an environment of slowing growth.
Given that we’re at the top of another US economic cycle, we wouldn’t be surprised to see more near-term improvement in private payrolls and the unemployment rate, which is notorious for being the most lagging of all economic indicators. Over the intermediate-term, however, we don’t see domestic or global growth coming in at high enough rate for meaningful improvement in the US labor situation. GDP and PCE comparisons remain extremely difficult to surmount in the absence of this much needed improvement.
While consensus focuses on lagging indicators, such as Friday’s unemployment report, keep your eyes on the leading indicators of market prices, housing prices, the yield curve, and consumer and business confidence – all of which are going the wrong way for growth bulls. Alongside Housing Headwinds II, the Consumption Cannonball is alive and well…