Baby Boomers + Labor Market = Low Wage Growth

The one thing that has been consistently missing from this otherwise textbook recovery that was engineered by the US Federal Reserve is sustained wage growth. The one thing that has been consistently ignored in the narrative of the recovery has been labor force participation. The trend has been one of declining participation ratios, and this can only be expected to accelerate. The acceleration in the rate of decline of labor force participation is predominantly driven by the Baby-boomer exit from the labor market.

In terms of a lack of sustained growth in real wages in the last almost two decades, again the burden lies with the Baby-boomers. Wages grew while the Baby-boomers entered and matured in the workforce, including the macro-introduction of women into the labor market. Now we are at a point where Baby-boomer wages have increased for decades and now on aggregate are at their caps. Paired with Fed-backed low inflation expectations, employers on average have no reason to increase wages. However, as the Baby-boomer retirement trend accelerates, and their share of the labor pool shrinks, employers would have to increase wages on aggregate to keep or attract younger talent.

All-in-all things seem to work themselves out. Millennials get to experience sustained wage growth over some period congruent with experience and education, and long-term employers see their average wages fall as the boomers retire. Now let's take this slice of relative tranquility on the labor side of the Fed Mandate and overlay it with the pricing side of that same mandate.

The unwind of the Fed's Quantitative Easing  policy and effective tightening of monetary policy, along with similar positions being adopted by other Central Banks means financial and other inflation sensitive assets will continue to reprice lower.  Simultaneously, President Donald Trump is pursuing a trade policy that in one way or another will lead to higher consumer prices in the U.S. through higher import prices. U.S. households look to be caught in a full pincer maneuver. From one side they will be hit with falling financial asset prices which reduces the value of their savings, from the other side they will be hit by increasing consumer prices stemming from trade disputes, and finally from above with demographic pressures keeping wage growth subdued.

Long story short, when U.S. discretionary spending starts contracting a recession will soon follow.