The Big Idea

A stealth jump in income

| December 3, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The GDP report released the day before Thanksgiving appeared quiet on its face, with real growth for the third quarter barely revised. But the report included two elements that substantially strengthen the case for robust demand in 2022.  First, the report revised second quarter wages and salaries up and showed a massive boost to household incomes. Second, preliminary estimates of third quarter corporate profits showed a third straight quarterly surge, further boosting the wherewithal of businesses to spend aggressively next year.

Wage and salary income revised up

The US Bureau of Economic Analysis’ wage and salary income estimates rely on the Bureau of Labor Statistics’ monthly payroll survey. That survey uses responses from a subset of businesses to gauge overall levels of employment and pay. The BLS also conducts a quarterly census of employment and wages, canvassing all businesses that participate in the unemployment insurance program. The BEA uses the quarterly census to re-benchmark its wage and salary income estimates. The census by definition is more comprehensive than the monthly survey, which includes assumptions about the births and deaths of establishments and may not be entirely representative of the universe of businesses in every quarter.

Last month, the BEA incorporated the newly available benchmark data for the second quarter into its wage and salary income figures.  The result was a massive upward adjustment of more than $100 billion annualized, boosting the income growth rate for the period by a full two percentage points.

Moreover, that boost not only carried over to the third quarter but was boosted further, likely reflecting the upward revisions to August and September payrolls in the October employment report.  In fact, revised third quarter wage and salary income jumped higher by almost $150 billion.

Average hourly earnings are rising at a pace somewhat slower than headline inflation, leading some observers to argue that workers are falling behind in real terms.  That may be true for some individual households.  However, aggregate wage and salary income in October advanced by 9.8% from a year early, reflecting higher hourly wages, a sharp rise in the number of people working, and a longer average workweek.  Even with the PCE deflator running above 5%, households in the aggregate are staying well ahead of price hikes.

Despite the massive drop in wage and salary income during the lockdowns in the spring of last year, it returned to the pre-pandemic trend line by early 2021 and has since blown through where the pre-pandemic growth pace would have taken it (Exhibit 1).  I can create a hypothetical series for wage and salary income in the absence of Covid by extending that average growth rate up to February 2020 through the next 19 months.  The sum total of wage and salary income for that hypothetical series from March 2020 through October 2021 is almost exactly equal to the actual sum, which includes the massive drop during the lockdowns and the subsequent strong gains.

Exhibit 1: Wage and salary income has passed the pre-Covid trend

Source: BEA.

In other words, the cumulative amount of wage and salary income over the first 19 months of the pandemic is roughly equal to what it likely would have been in the absence of Covid.  Add on top of that the trillions of federal payments, mainly in the form of rebate and bonus unemployment checks, and it is easy to see why households are so flush and why the economy is overheating.

One might counter that surging wage and salary income gains this year are merely replacing federal Covid benefits. In fact, unemployment benefit payments have declined by about $500 billion annualized over the last four quarters, but wage and salary income has surged by more than twice that amount.  Even combining wage and salary income with the diminishing unemployment checks, this broader proxy of labor-related income was up by 5.5% in the third quarter from a year earlier.  Since wage and salary income is likely to continue to increase rapidly as the labor market recovers while unemployment benefit payments had fallen to a trivial level by October—less than $50 billion annualized—and will not go much lower, this broader measure of labor income is poised to maintain outsized gains and could even accelerate over the next several months.

Given that consumer spending was not revised by nearly as much as income, the implication is that the stockpile of spendable funds that households are sitting on, which has swelled by about $3 trillion since the pandemic began, was actually even higher than previously thought in the second and third quarters.  In short, households are flush, even more so than we thought, and are likely to spend aggressively over the foreseeable future unless the pandemic takes a nasty unanticipated turn.

Corporate profits

Meanwhile, businesses also saw their incomes rise rapidly in the third quarter.  The BEA’s first estimate of corporate profits for the period was released in the November GDP report.  After spiking by $268 billion or more than 10% unannualized in the second quarter, one might have expected profits, which can be erratic from quarter to quarter, to take a breather in the third quarter.  Instead, they rose by another $121 billion, or 4.3% last quarter.  The third quarter rise was the third straight triple-digit quarterly advance this year (Exhibit 2).

Exhibit 2: Corporate profits have continued to accelerate

Source: BEA.

Corporate profits have exploded this year as economic growth has been robust.  The level of profits far exceeds what any pre-pandemic trend might imply.  The performance is especially impressive in light of the intense cost pressures that most businesses face, with materials, shipping and transportation, and labor all growing much more expensive.  In the face of these issues, firms have, if anything, expanded their margins.

Most of the extra money that businesses have generated in 2021 will likely be plowed back into operations, funding additional gains in capital investment as well as pay hikes to attract and retain scarce workers, providing another boost to demand going forward.

As a side note, the fact that corporate profitability has risen sharply should be viewed by the Fed as a troublesome sign.  Fed officials have insisted that the pre-pandemic downward pressures on inflation will soon re-exert themselves, but it appears that many firms have managed to gain a degree of pricing power not seen in decades.  If that pricing power is maintained, inflation will prove far more stubborn than policymakers are hoping.

Momentum in the New Year

What, on its face, looked like a quiet GDP report, released on a day when many people were out of the office, actually shows that household and corporate income was almost $300 billion higher than previously thought.  Most of these funds will presumably be spent over the next few quarters, adding further to the economy’s momentum heading into the new year.

Stephen Stanley
1 (203) 428-2556

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles