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The Economy's Biggest Risks

Morningstar's Bob Johnson cites possibly detrimental goverment policy and a stalled real wage as trouble spots for the recovery.

Jason Stipp: I am Jason Stipp for Morningstar. It's Risk Control Week on, and I am here with Morningstar's Bob Johnson--he is associate director of economic analysis--to talk about some of the worries that are facing the economy, which ones merit some real attention and which ones might be overblown. Thanks for joining me, Bob.

Bob Johnson: Good to be here.

Stipp: So, the first question I wanted to ask you is, as an economist what's the one thing that probably keeps you up at night when you are thinking about the future for the economy and what could affect it positively or negatively?

Johnson: I think government policy actions here or throughout the world are probably my number one worry.

Stipp: So things like taxation or, you know, moving up and down what they are going to charge for dividends and things like that or what specifically?

Johnson: Sure. There's a number of things. Let's touch on a – taxation is certainly one of them. And we are coming up at the end of the year where we are going to have a different tax regime on capital gains and dividends unless they change the law. And I think there was an outside chance that they actually may add on to those taxes, and I think that's very bad for the investment climate to have those taxes on investment income going up so much. So I think that's harmful, and I think there is potential for them to do even more damage there. So that's on the taxation side.

And my probably biggest worry is we do something tariff or trade wise. It may not be a trade dollar-for-dollar thing, but maybe it's a safety regime for things imported from China or something that escalates into a trade war. I think we are very much tied with China right now in terms of our trade relationship, and we are really both helping each other out, and I think we stand some problem if we put down a new tariff or say we are not trading with China anymore.

Stipp: So, moving on to some of the other things that you closely watch, I know that the consumer spending obviously is an important part of the recovery and how much consumers make is a big driver of how much they are going to spend. And real wages is one of the things that you look at. Tell me a little bit about why you are looking at the real wage and what it has been doing recently?


Johnson: Real hourly wages is a combination of the nominal wage that everybody makes, that is the dollars and cents that are actually in their paycheck, then adjust it up or down for the amount of inflation that you've had, so that we are really comparing apples-to-apples.

It could make a lot more money, but if you had high inflation, you have to reduce it down back to a normalized number, and so that's what the really wage number does.

Stipp: And so certainly, because we have seen relatively mild inflation recently and maybe even a little bit of deflation in some periods during the downturn, that has helped the really wages actually hold up, then.

Johnson: Yes, exactly. In fact, one of the best indicators of the economy was turning last year was an increase in the real wage. It was up 3% or more in the first six months of last year, of 2009 that is, and the reason that it was up so dramatically was not that the wage went up very much, in fact, it probably was pretty flat.

But the real wage went up because deflation was actually invoked for four to six months there, and that caused the real wage to be one of the highest numbers that it had ever been, which is kind of a 3% to 3.5% increase every month for, like I said, four to six months in early 2009. And that's reversed now, and it has been relatively flat as inflation has come back, especially energy prices have come back.

Stipp: So what are some of the things, then, if it's been sort of flat recently, is that a concern? Or what are some of the things that could help it get some traction or also maybe cause it to go down?

Johnson: It really had its peak back in last fall, and it's a long-lead indicator and I think it may be partly responsible for some of the softness we have seen now here in April and May in terms of retail sales. So it has got explanatory abilities.

Stipp: So, if we're hoping that that might go up at some point, what could be behind that? What could cause it to get a little bit of addition to it?

Johnson: Labor tightness certainly helps the nominal part of that wage go up. And again, I think there are pockets of the economy that are a little bit stronger, and you are seeing wages going up. You have got all the things like construction in California, which are probably still trending down at a pretty healthy clip.

So you have got those offsetting factors, but I think real wages overall are clicking back up. And again, I have to remind people, when I say real wages are up, everybody says, "Well I don't know anybody who has gotten a raise." Well, there are a few things going on there. Remember that it is inflation adjusted, so that's helped out in a lot of months, and it may help out in the next couple of months.

And the other is, if there is a little bit of a mix change with people that generally have higher paying jobs are working more and the people with lower paying jobs are working less--that changes the number around a little bit, too. But again, even still as an economist that helps the economy.

Stipp: Another issue that's somewhat related to the wage as well, and you alluded to this a little bit earlier. You said you hadn't heard a lot of people saying that they've gotten raises, but I think the unemployment rate is something that a lot of folks are worrying about, and they might have put that at the top of their list of concerns over the economy.

What's your take on the unemployment rate? And if it's easy for me to go out and hire somebody else if you want to quit because you are not making enough, might that have some downward pressure and to what extent should we worry about unemployment right now as a risk factor?

Johnson: Yeah, I think that some people are very concerned that unemployment could depress wages and consumer spending in the months ahead. And I am a little bit more in the camp that unemployment selective. There are sectors where it's very tough to find a job, nearly impossible, and there are others where it's hard for an employer to find employees right now.

And I think you are seeing an increased number of companies stealing others' employees, and I think you are seeing employers doing the same things, selectively raising people's pay. The day everybody gets a nice 3% raise across the board, I think those days are gone, but there is not a major Fortune 100 company that isn't sitting down with a committee and saying, what can we do to retain our best people. And some of them, it's going to be wage income and some of it's going to be policy issues.

Stipp: So, I guess the last point I want to ask you then is to broaden that out a little bit because we have seen that the employment situation has been slow to recover, and I think that leads overall to the pace of recovery. Perhaps it has been slower than maybe we thought it might have been a few months ago, and I want to get your take on, is that a risk factor? Is the fact that the recovery is a little bit slower than it might have been a bigger risk than if we'd seen a really robust and quick recovery?

Johnson: Well, let me just say that I was in the very robust economy camp, and we were right for a little bit in December and the consumer spending was certainly better in the March quarter. Now it has slowed up a little bit.

So it hasn't been as robust as I had hoped. And the good news is that sometimes when things spread out over more time, it's more sustainable. These things roll from sector to sector and you don't get to an unsustainable situation where you go from doing nothing to doing so much you've got no capacity left and you raises prices and you create all sorts of other problems in the economy--which I was fearful of high inflation this year because of the growth and frankly the slower growth is really going to dim that view. So, slower growth does have its bright side.

The bad news is that because it's not growing as fast, everybody is tinkering with it and well, maybe we should have one more jobs bill, and I think that's really bad news.

Stipp: Again, it goes back to your first point of there could be some government tinkering in there and it could actually be detrimental?

Johnson: Right. Because I think at this point, I think things need to settle out a little bit and people need to shift. I don't think we really want to be in a situation of extending programs without thinking about it.

Stipp: Sure. Bob, thanks so much for your insights on the economy today.

Johnson: Thank you.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.