President Trump cheered as the Dow topped 25,000 for the first time ever Thursday, claiming that the record for the stock market index is evidence that “make America great again” is happening. There's no doubt the U.S. economy and Wall Street have momentum heading into Trump's second year as president, but worker pay remains frustratingly flat.
American wages rose a sluggish 2.5 percent last year, according to a Labor Department report released Friday morning. That's the same rate of wage growth as under President Barack Obama. Historically, wages have grown more than 3.5 percent in a typical economic upturn, but that hasn't happened in this expansion.
Trump is facing a similar problem that plagued Obama: The stock market is soaring, but wages are stagnant. The Dow Jones industrial average jumped 25 percent in 2017 and is up more than 30 percent since Trump won the election, but those gains largely accrue to the wealthiest Americans, including many of Trump's donors and close friends. Almost half of the country doesn't have a single dollar in the stock market. While some in the middle class do invest via pension funds and 401(k) retirement plans, only a quarter of American households have more than $25,000 in the market, according to a Deutsche Bank report released this week.
“Trump's donors are doing spectacularly well. But Trump's base in West Virginia and Kentucky hasn't really enjoyed much of the recovery,” says Greg Valliere, chief global strategist at Horizon Investments and author of a daily political newsletter.
Trump campaigned as a populist who understood the needs of America's forgotten towns, especially in the Rust Belt, and giving these people a raise was a key promise. “Democrats will try to exploit that, but Trump's base is willing to give him more time,” predicts Valliere, although heading into the 2018 midterm elections, Republicans would like to show a win on wages.
The Trump administration claims that the massive tax cut bill the president signed shortly before Christmas is already raising wages for workers. A handful of companies have announced some sort of pay increase, making a difference in the lives of the workers at those firms, but widespread gains remain elusive.
So far, only 18 of the companies in the S&P 500 stock index have cited the tax cuts in announcing additional pay of any kind. Only five of those companies — all banks — announced a true wage hike, lifting hourly wages to at least $15 an hour. The rest are offering workers a one-time bonus (typically of $1,000) or a modest amount of additional money in a retirement plan.
One-time bonuses and perks like gift cards became popular during the Great Recession as a way for companies to reward employees without hurting the bottom line because they don't raise hourly wages.
“Tax cuts won't be the main driver of determining how much companies pay employees,” says Gregory Daco, chief U.S. economist at Oxford Economics.
After Trump signed the tax bill, AT&T was one of the first to announce it would give its 200,000 U.S. workers a one-time $1,000 bonus. AT&T has a major merger deal that needs Justice Department approval, leading some critics to say the bonus was a PR move. The company is expected to gain from the substantial reduction in the corporate tax rate from 35 percent to 21 percent. AT&T's effective tax rate at the moment is 33 percent, meaning it is likely to save billions in taxes in the coming years. The one-time bonuses will cost the company $200 million.
Most of the gains from the corporate tax cuts are expected to go to shareholders as stock prices rise and companies pay higher dividends. Dividend payments hit an all-time high in 2017, according to Howard Silverblatt of S&P Dow Jones Indices.
“We want to get a more even recovery. Unfortunately, stock market gains alone don’t get you there,” says economist Diane Swonk of DS Economics.
The tax bill gives bigger benefits to the rich than the middle class, according to independent analyses, but it does lower taxes for more than 80 percent of American families. Trump says workers will start to notice fatter paychecks in February as the government takes less of people's money in taxes. Middle-class families making $50,000 to $85,000 a year are expected to get a tax cut of about $1,000 this year, according to the Tax Policy Center, a think tank. It's more income in people's pockets, but it isn't from companies raising wages.
Still, momentum is on Trump's side when it comes to the economy, which may be why his base is willing to give him more time until they see higher pay. Growth has picked up, small business confidence is at the highest levels since Ronald Reagan was president, and businesses are finally starting to invest more in new machines and equipment, which should boost growth more this year.
Economists say 2018 could be the year companies finally give workers more money, not because of the tax cuts but because it's getting harder to find workers. The U.S. unemployment rate is already at a 17-year low of 4.1 percent, and it's expected to fall below 4 percent this year. JPMorgan's chief strategist predicts the jobless rate could fall as low as 3.4 percent this year, the lowest level since 1969.
“By spring and summer, I think you’ll see a lot more action from companies on wages” and more training, DS Economics' Swonk said. “I think this is the pivotal year. It’s good news for workers.”
CEOs are complaining they can't find enough good workers to fill all of their job openings. Talented workers have largely figured out that the best way to get a raise in this economy is to change jobs. ADP, a company that processes payroll for many of America's largest corporations, tracks wage and salary data. For years, ADP has pointed out that people who change jobs get a bigger pay bump than people who stay put.
If CEOs don't want their best workers to leave, they are likely going to have to pay more.
Swonk also pointed out that 18 states raised their minimum wages on Jan. 1, another factor that will fatten paychecks and start to show up in the data.