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By Jason Stipp | 01-06-2011 05:53 PM

Three Yellow Flags for the Economy

Morningstar's Bob Johnson says flat nominal wages, increasing signs of inflation, and strapped state and local governments could hinder consumer spending.

Jason Stipp: I'm Jason Stipp for Morningstar. During the depths of the economic downturn, Morningstar's Bob Johnson was able to see some glimmers of hope, when other folks only saw despair. But now that some folks' expectations for the economy are heating up, Bob is seeing some yellow flags out there that should be on your radar. He's here with me to explain.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, your yellow flags, your concerns over the economy right now are all related to the consumer because now is the consumer's time to shine; we've talked about this before. The first one has to do with what the consumer is taking home in the paycheck.

Johnson: Yes.

Stipp: Can you explain a little bit about what the situation is?

Johnson: Yes. What I really like to look as a good forward indicator is the real hourly wage. It is one of the most sensitive metrics that moves before employment or a lot of other indicators do, and that real wage number is what you get paid in nominal terms--what your check actually is each hour that you work--and then compare that to what inflation is.

Stipp: So, what are we seeing on the nominal front. We know that companies have squeezed a lot more efficiency out of their workers. Have they seen that reflected in their paychecks at all in nominal terms really?

Johnson: The nominal numbers are relatively flat and really have been for a fairly long period of time.

Stipp: So, this kind of leads to a second question then, it's something that we've discussed before. Inflation has been pretty tame, so although you haven't been getting a raise from your employer, over the last year or so, you also haven't seen your costs necessarily increase and in some cases, they might have gone down, correct?

Johnson: Yes, you actually got a de facto raise in some portions of 2009, because there was actually deflation and everybody's checks stayed about the same. So, that was a really big help. It was one of the signals that we might come out if this recession; it came early on, when almost nothing else did.

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