Take home pay picks up in May, according to Voca

• Index strengthens after four months of decline
• Industry sector pay growth shows increase alongside manufacturing revival  
• Healthy pay packets expected to support upward trend in retail sales

6 June 2006 – Growth in take home pay rose in May to 4.0 per cent from 3.3 per cent in April, according to the Voca take home pay index .  The index had been falling steadily since the start of 2006 after rising to a high of 5.8 per cent in December 2005. To read the full press release, please click here.

Key findings of the report

• In May, the Voca take home pay index rose to 4.0 per cent from 3.3 per cent in April. The index is based on the annual change of a three-month moving average.  See Figure 1.
• 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 will continue on its upward path.
• The Voca industry index saw a rise in the year-on-year change for the three months to May to 3.1 per cent from 1.7 per cent in April whilst the Voca services index rose to 4.7 per cent from 4.5 per cent in April. See Figure 2.
• The overall rise was a result of increases in both the Voca industry index and Voca services index. It comes following four consecutive declines and points to the industry index returning to trend, after the impact of redundancy payments in late 2005 and the consequent correction in early 2006, as well as bonus payments paid at the end of the financial year. Growth in take home pay in the service sector continues to drive growth in the Voca take home pay index as disposable income in the service sector index grows faster than the industry index.

The Voca take home pay index series
Three month average annual change (per cent change)


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

Figure 2: Voca industry and services index

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

• UK GDP was confirmed to have risen by 0.6 per cent in the first quarter of 2006 from the previous quarter. Financial services was the most buoyant sector in the quarter, surging a massive 2.7 per cent in the quarter alone. On a year-on-year basis, the sector is 5.4 per cent larger than it was in Q1 2005. This is echoed in the strengthening growth of the Voca take home pay index for the service sector in May which will have been supported by the bigger bonuses in financial sector jobs.
• The latest official labour market data points to mixed signals regarding the economy outlook. Unemployment rose yet again, by 7,700 to 945,500 in April, reaching a three year high whilst the number of people in employment rose by 127,000 in the first quarter of 2006, leaving the employment rate 0.2 percentage points higher than the previous quarter. Average earnings including bonuses rose by 4.2 per cent in the three months to March, and excluding bonuses earnings increased by 3.8 per cent. This is in line the Voca take home pay index (particularly the service sector sub-index) which has strengthened.
• The latest official data shows that in March the manufacturing sector grew by 0.7 per cent — the fastest rate in eleven months — to reach the highest level of output recorded since August 2005. This highlights the revival in the sector and we expect that with the more favourable inventory cycle the sector will continue to pick up this year. This is reflected in the Voca take home pay index for the industry sector which, following the boost to the Voca take home pay index in late 2005 due to redundancy payments in the sector, has now returned to trend. However, inflationary pressure on the sector could suppress the size of its recovery. Producer input prices rose by 2.5 per cent in April from March with oil prices accelerating to record highs adding to the inflationary worries for the UK’s production industries. If this trend continues we can expect earnings growth in the sector to be more subdued as firms try to keep labour costs down in response to the high input prices.
• The volume of retail sales increased by 0.6 per cent in April from March continuing on its upward trend. This follows growth of 0.9 per cent in March and 0.3 per cent in February. The total volume of sales in April this year was 3.0 per cent higher than in April 2005. The improving trend in consumer spending will enhance optimism amongst retailers. In addition, given the correlation between the Voca take home pay index and the comparable retail sales data (as illustrated in figure five), the latest rise in the Voca take home pay index indicates that the trend will continue on its upward path. This combined with stronger gross domestic product growth in 2006 and a housing market recovery will continue to support underlying retail demand.
• Consumer price inflation is likely to be quite volatile over the coming year and to remain generally above its 2.0 per cent target. UK consumer prices rose in April pushing up the annual inflation rate to 2.0 per cent from 1.8 per cent in March. Consumer prices rose 0.6 per cent in the month — the highest monthly rise since May 2001. The Bank of England indicated in its quarterly inflation report that a slight increase in rates may be necessary to keep inflation under control in the medium term. Although this and strengthening disposable income growth, as evident in the Voca take home pay index, point towards a rate rise, it is unlikely to happen soon whilst concerns about growth remain, as high oil prices and their secondary effects begin to bite.