Watching the Economy by Clint Burdett CMC® FIMC

10/18/2012

What We Spend Compared to
What We Earn (Wonkish)

We have had lots of good news entering the fall: unemployment improving, down to 7.8%, foreclosures way down, housing starts up 38% from last year in September, lending increasing.

But the last four years, we reacted to the Great Recession, held firm or reduced workers' earnings (mine and my wife's) and hired younger, cheaper workers, which in the long term will make us more competitive, but short term, reduced consumer demand.

Is a key driver of consumer demand, our confidence we can spend more, coming back because we are paid more? To make a judgment we examine the relationship between national measures of consumer pay and spending:

For pay, Real Average Hourly Earnings computed by the Bureau of Labor Statistics (BLS).

For spending, Real Personal Consumption Expenditures (PCE) computed by the Bureau of Economic Analysis (BEA) for consumer consumption of goods and services.

In both measures, real means inflation has been subtracted.

Overtime, improved pay compared to a year ago leads to more consumption compared to a year ago, so average real average hourly earnings improvement is usually a leading indicator for more household spending. By how many months?, 0 to 9 months following "normal" business cycle recessions with a "V" recovery.

The Great Recession (or more accurately the Great Contraction) has not been a "normal" recession and the recovery will continue to be slow (Reinhart/Rogoff Oct 2012).

Have we started to see improved earnings? You judge.

(Click to open on St Louis FRED)