Younger consumer seeing less wage growth, less purchasing power, says JPMorgan's Chris Wheat

Key Concepts

• Personal Income and Spending Data: Economic indicators that track how much money individuals earn and how they spend it. The Personal Consumption Expenditures (PCE) price index, a key inflation gauge for the Federal Reserve, is part of this data.
• Income Growth: The rate at which individuals' earnings increase over time.
• Younger Population/Young Workers: A demographic group, specifically mentioned as 25-35 year olds, whose economic behavior is being analyzed.
• Labor Market: The dynamics of supply and demand for labor, including job availability, wages, and worker mobility.
• Asset Price Appreciation: The increase in the value of assets such as stocks and housing.
• Credit-Driven Spending: Consumer spending that is financed through borrowing.
• Job Turnover: The rate at which employees leave and are replaced in jobs, often seen as an indicator of a healthy labor market.
• Cautious Investment Decisions: Businesses making investment choices with a higher degree of prudence due to economic uncertainty.

Economic Signals from Consumer Behavior

This discussion focuses on recent economic signals derived from consumer spending patterns, particularly highlighting the challenges faced by the younger demographic. While official September personal income and spending data, including the Fed's preferred PCE inflation gauge, were not yet released, insights from corporate earnings reports, specifically Chipotle, have provided early indications of consumer pressure.

Challenges for the Younger Population

• Chipotle's Observations: Chipotle reported a broad pullback in spending across all income groups. However, the company specifically noted that the 25 to 35-year-old demographic is experiencing particular challenges. This observation led to a significant drop in Chipotle's stock value, losing nearly a quarter of its worth.
• JP Morgan Chase Institute Report: Chris Wheat, President of the JP Morgan Chase Institute, discusses their findings on personal income. The report indicates that for the year as a whole, income growth has been "tepid" (slow and unenthusiastic). In recent months, this growth has started to decline.
• Tightening Income Gap: Historically, younger workers have seen the strongest income growth, creating a significant gap between them and individuals further along in their careers. However, this gap has tightened in the last couple of years, suggesting less robust income growth for young people and, consequently, reduced purchasing power.

Implications for the Overall Economy

• Income as a Starting Point: Chris Wheat emphasizes that income is a fundamental driver of economic activity, as it represents the money households receive and subsequently spend, save, or invest.
• Divergent Economic Experiences: The discussion highlights a growing divergence in economic experiences based on age and asset ownership.
  • Older Americans and Asset Holders: Individuals with greater exposure to assets like stocks and housing are benefiting from rising asset prices. This group is experiencing positive wealth effects.
  • Younger Individuals and Non-Asset Holders: Those without significant asset ownership do not benefit from these price increases, leading to different spending patterns and economic well-being.
• Credit-Driven Spending and its Limits: There is a concern that some spending, particularly among younger and working-class individuals, is credit-driven. This type of spending can only be sustained for so long and may eventually reach a limit.

Labor Market Dynamics

• Softness in Income Growth: The observed softness in income growth, especially for younger demographics, is interpreted as a signal for the state of the labor market.
• Employer Caution: This income trend, coupled with a lack of behavior consistent with a robust labor market (such as frequent job switching), suggests that employers may be uncertain about the future economic outlook. This uncertainty could lead to more cautious investment decisions.
• Job Mobility and Income Growth: Chris Wheat explains that for many, changing jobs is a primary mechanism for achieving income growth. When individuals feel confident about the economy, they are more likely to seek out better-fitting and higher-paying positions, leading to increased job turnover. While job loss is undesirable, proactive job switching can be a positive indicator of a healthy labor market. The distinction between losing a job and leaving a job voluntarily is crucial in this context.

Key Arguments and Perspectives

• Argument: The economic struggles of the younger population are a significant indicator of broader economic trends, particularly within the labor market.
  • Evidence: Chipotle's earnings report showing a specific challenge for the 25-35 age group, and the JP Morgan Chase Institute's data on tightening income gaps for young workers.
• Argument: Economic well-being is increasingly bifurcated, with asset owners benefiting disproportionately from current economic conditions.
  • Evidence: The contrast drawn between older Americans with stock and housing assets and those who do not possess such assets.
• Argument: A slowdown in income growth and reduced job mobility can signal employer uncertainty and a more cautious labor market.
  • Evidence: The interpretation of tepid income growth and less frequent job changes as indicators of employer caution and potential economic headwinds.

Notable Quotes

• "We have been looking at income growth for a while. uh to really understand uh the take-home income in particular that people see. Um for the year as a whole, we've really seen quite tepid growth." - Chris Wheat, JP Morgan Chase Institute.
• "Usually those young workers are seeing the strongest growth. Um quite a gap between the youngest and people farther along in their careers. we really have seen that tighten uh a bit in the last couple of years suggesting less growth for those young people and less purchasing power as a result." - Chris Wheat, JP Morgan Chase Institute.
• "When you see that softness in income, uh when you don't see the kind of behavior that's consistent with people moving between jobs, kind of the things you like to see in a robust labor market, it certainly makes you think that employers and others are maybe uncertain about what's going to come and making investment decisions in a more cautious way that could reflect that." - Chris Wheat, JP Morgan Chase Institute.

Conclusion

The discussion underscores that while official economic data is pending, anecdotal evidence from corporate earnings and reports from institutions like JP Morgan Chase Institute point to a challenging economic environment, particularly for younger consumers. This is characterized by tepid income growth, a tightening gap between young and experienced workers, and potentially unsustainable credit-driven spending. These trends have implications for the broader labor market, suggesting potential employer caution and a less dynamic job market than typically seen in robust economic cycles. The widening disparity in economic benefits between asset owners and non-asset owners is also a significant takeaway.