Take home pay steady in July, according to Voca

• Industry pay growth overtakes growth in services sector
• Improving trend in retail sales set to continue

31 August 2006 - The Voca take home pay index  shows growth in take home pay steady at 5.2 per cent in July. The index, which is based on a three month moving average, has flattened out following two months of increases. To read the full press release, please click here.

Key findings of the report

• In July the Voca take home pay index rose by 5.2 per cent after rising by exactly the same in June. The index is based on the annual change of a three-month moving average.  See Figure 1.
• The Voca industry index saw a rise on a year-on-year basis for the three months to July to 6.1 per cent from 4.9 per cent in June. This was offset by a decline in the Voca services index which fell to 4.5 per cent from 5.5 per cent in June. See Figure 2.
• Take home pay in the industry sector is now increasing, for the first time in six months, at a faster rate than pay in the services sector. This could be due to an increase in exports in the manufacturing sector.
• Given the correlation between the Voca take home pay index and the comparable retail sales data (see figure 5), the latest rise in the Voca take home pay index indicates that the improving trend in retail sales should continue on its upward path.
• The strong growth in take home pay over the second quarter of 2006 could indicate room for an interest rate rise soon.

The Voca take home pay index series
Three month average annual change (percent increase)

 
Results
Figure 1: Voca take home pay index against private sector Average Earnings Index

Figure 2: Voca industry and services indices

Figure 3: Voca industry index against private sector AEI (manufacturing sector)

Figure 4: Voca services index against private sector AEI (service sector)

Figure 5: Voca take home pay index against retail sales index (all retailing)

Economic commentary from cebr

• The latest economic data is mixed with strong growth in the second quarter of 2006 alongside uncertainties in the labour market and above target consumer price inflation. The latest Voca take home pay index has slipped back slightly but has grown steadily in recent months indicating that there is room for a further interest rate rise this year.
• The UK economy expanded by 0.8 per cent in second quarter of 2006 supported by the consumer recovery. After expanding 0.7 per cent in the first quarter, the economy’s upswing has continued this quarter, taking year-on-year growth up to 2.6 per cent from 2.3 per cent in the first quarter. The figures will have been given a boost by retail spending brought forward for the World Cup, but also by a consumer who continues to gain ground following a poor showing in 2005. However, we continue to believe that the economy is unlikely to see any further acceleration this year and therefore we expect to see more subdued growth in disposable income in the coming months.
• National statistics data releases on the UK labour market continues to track the continual increase in unemployment. Employment growth is slowing and unemployment is accelerating. The latest official earnings data continue to support the Voca take home pay index with the growth in services and manufacturing in-line with the Voca sub-indices. The weak labour market has indeed nudged down the three-month moving average of wage inflation to 4.1 per cent in May, from 4.4 per cent in April - shying away from the 4.5 per cent danger area. Wage inflation in both the public and private sector fell over the period — although the private sector service industry saw the largest deceleration. 
• Retail sales strengthened in June registering 0.9 per cent volume growth in the month. In addition, May’s growth figure was revised up from 0.5 per cent to 0.7 per cent, to leave the volume of retail sales 3.6 per cent larger in June 2006 than in June 2005. However, the extent of the consumer upswing can only be assessed by whether it continues in the latter stages of this year and into next. The correlation between the Voca take home pay index and the comparable retail sales data is illustrated in figure five.
• The manufacturing sector expanded 0.5 per cent in the quarter, down from 0.9 per cent in the first. Nonetheless, a positive stock building cycle and increased exports by the manufacturing sector to the continent mean the sector is currently contributing positively to economic growth rather than negatively as in recent years.
• Consumer price inflation rose by 0.3 per cent in June from May pushing year-on-year growth to 2.5 per cent, from 2.2 per cent in May, according to figures released in July.  This 0.3 percentage point rise in the growth rate pushes inflation further above the 2.0 per cent target. Once again, the largest upward effect came from household bills, with the costs of housing, water, electricity, gas and other fuels increasing by 0.8 per cent in the month — prices in June were 9.8 per cent higher than one year ago.
• The Bank of England decided to keep interest rates frozen at 4.5 per cent for the eleventh month in a row in June but raised them by a quarter point in August. The decision to raise interest rates was made broadly against a background of positive initial estimates for GDP growth in the second quarter (rising at or slightly above the long-term average) and the judgement that inflation would remain ‘for some while’ above the 2.0 per cent target rate. The steady growth in disposable income highlighted by the latest Voca take home pay data should provide some comfort to the Bank.