Lee Schafer
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Minneapolis investment strategist Jim Paulsen writes for pros who manage lots of money and not $100-a-month savers, yet his latest note is worth sharing with anybody who has any savings.

Paulsen’s favorite chart in the research note is too complicated to easily describe, drawn from data on employment, inflation and economic growth, but his easy-to-grasp conclusion is that we should finally see some faster wage increases.

That sounds good for American wage earners, but maybe not so much for investors. A spurt in wage inflation could lead to higher interest rates this year and inflict some pain on owners of bonds and other financial assets.

There’s a larger point he’s making here, a very simple but powerful one: There’s nothing riskier when deciding what to do with your savings than concluding “this time it’s really different” in the market.

The old idea underlying Paulsen’s research note is called the Phillips curve, an economic concept named for crocodile-hunter-turned-economist A.W. Phillips. It only sounds wonky because it’s a sensible economics idea that easily meets the test of common sense, too.

Phillips in the 1950s looked all the way back to 1861 for information on unemployment and wage growth in the United Kingdom. In periods with lots of people out of work, there wasn’t much of an increase in wages, he found, and vice versa.

Economists put the relationship he found between inflation and unemployment on a chart.

The result? The numbers filling in along the Phillips curve form a line gently sloping down and to the right and show the rate of inflation continuing to slip as the unemployment rate gets higher.

Even with its long track record, what’s happened since the Great Recession has economists and investment managers doubting that the Phillips curve still holds up. Unemployment declined and then kept declining until it was bumping along at 4.1 percent late last year, a rate last seen back in the dot.com boom about 17 years ago.

Never mind the official number, the job market seemed tight, too. Employers complained that good workers have not been easy to find.

Yet few people besides Fortune 500 CEOs and NFL quarterbacks seemed to find pay raises easy to come by. Average hourly wages for 2017 only increased at a rate of about 2.5 percent, a slower rate of growth than in 2016.

Economics writers seemed to try out all sorts of explanations for this problem of sluggish wage growth, none all that persuasive.

Maybe workers really miss being part of a union arguing on their behalf. Or it could be that the labor market really is global now, and just a hint of rising wages at home gets employers to move work to lower labor cost countries. Or maybe workers still can’t get over the trauma of the Great Recession and are just happy to keep their jobs, with or without a raise.

It was a puzzle for Paulsen, too, the chief investment strategist for the Leuthold Group.

If analysts look close enough, Paulsen said in a conversation last week, the Phillips curve has made an appearance. The unemployment rate peaked at 10 percent near the end of the last recession before starting to decline. When the rate finally slipped to less than 6 percent in the fall of 2014, that’s about when wage growth picked up a little.

“What it did is go from 2 percent or less wage growth to 2½ percent or more,” he said. “To the naked eye it was hardly anything. Like everything in this recovery, it’s so very low, like economic growth. So people think it’s not working.”

Like other analysts, though, Paulsen kept looking for faster wage growth.

He finally decided that the economy just wasn’t growing fast enough. The economy perked up enough to get people back working, which is what the Federal Reserve governors and other policymakers cared about.

But demand across-the-board was never strong enough to force employers to pay a lot more.

As Paulsen looked at the numbers, he focused on the relationship between the growth rate of the economy and the unemployment rate. In this work, Paulsen used the nominal rate of growth, meaning before adjusting for inflation. In this long recovery, that annual growth rate number had never exceeded the unemployment rate.

That is, until lately. The nominal growth rate for last year was 4.4 percent, finally topping the jobless rate, which got to 4.1 percent.

His research shows that in the past, wage inflation really heats up when the nominal growth rate of the economy exceeds the unemployment rate. “Now, something just changed that could really alter the outcome,” he said.

Indeed, early Friday, a couple of days after this conversation, the Labor Department said average weekly wages for January increased by 2.9 percent. That was the fastest wage growth in eight years.

There have been other signs of a pickup in inflation lately, too, and if average wages start growing faster, there will be what Paulsen called a “rate reset” in the bond market.

Bond prices, of course, go in the opposite direction of changes in interest rates, slumping as interest rates increase. Stock market investors could be in for some rough weather, too.

Paulsen cheerfully volunteered that he could be proved wrong about the significance he put on the growth rates he just wrote about. On the other hand, he seemed sure that the “this time it’s different” idea will once again prove no more valid than it ever has.

It’s true that the economy and the markets are never exactly like they were any time in the past, he said, but he cited the famous observation attributed to Mark Twain that even if history doesn’t repeat it sure does rhyme.

We may have cool new technology now along with countless other differences from the economic eras that Phillips researched, he said, but decisions are still made by people and people still seem to swing from fear to greed and back again.

“That’s why Phillips 200 years ago and Phillips today, they are still rhyming,” he said.

lee.schafer@startribune.com 612-673-4302