Energy Higher, Earnings Lower

Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.

As we all know, what matters isn't our nominal earnings, it's what our earnings can buy that counts. If it takes an hour of labor to buy four gallons of gasoline, it doesn't really matter if we're paid $1.60 an hour and gasoline costs 40 cents a gallon or we're paid $16 an hour and gasoline costs $4 per gallon. Ditto $16,000 an hour and $4,000 per gallon.

What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons. This is called purchasing power, and rather naturally the Status Quo has worked mightily to cloak the reality that our purchasing power of the bottom 95% of wage earners has been declining for decades. More recently, 2011, real median household income was 8.1 percent lower than in 2007.

So even as nominal earnings rise, earnings lose purchasing power. 

These charts, courtesy of our Chartist Friend from Pittsburgh, depict the dynamic of energy costs, loss of purchasing power and earnings. The first chart plots hourly earnings and energy costs.

Predictably, that rise in energy costs triggered a deep recession made even more severe by the bursting of the housing bubble. The sharp decline in oil to $35/barrel caused real earnings to spike once again, and then decline sharply as oil returned to the $100/barrel level.

Adjusted for energy CPI (consumer price index), real earnings are back to the recessionary lows of the early 1980s. How much new debt can households leverage when their real earnings are declining?

The next chart shows earnings and the entire consumer price index (CPI) that includes all components, not just energy. Once again we see a decline in the era of stagflation, high CPI and the general adjustment of the U.S. economy to global competition and diminishing returns

 

Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.

 

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A blog I highly reccomend:  Of Two Minds  By Charles Hugh Smith