Falling U.S. Wages Threaten Consumer Spending
October 3rd, 2011
By: Sho Chandra and Steve Matthews
Ninety-one percent of people in the U.S. labor force have a job. That may be the extent of the good news for these Americans, whose incomes tell a darker story.
Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.
Salary and benefit growth “has been going nowhere,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “One of the key reasons the recovery has stalled is that real incomes have fallen.”
While policy makers from Federal Reserve Chairman Ben S. Bernanke to President Barack Obama focus on cutting unemployment stuck near or above 9 percent since April 2009, the widespread stagnation in wages may offer a better explanation for the failure of economic growth to accelerate two years after the end of the recession. Workers’ ability to negotiate higher earnings won’t return until the job market strengthens, and flagging confidence has raised the risk that consumers may retrench.
Inflation-adjusted weekly earnings have fallen for six consecutive months, dropping 1.8 percent in August from a year earlier, a pace not seen since the 18-month economic slump ended in June 2009.
“Those who are employed are worried about their income and are seeing real purchasing power get squeezed, therefore they’re set to retrench a bit,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who has served on the Fed board’s forecasting team. “That’s the danger right now. It means the recovery remains very fragile.”
Companies including United Parcel Service Inc. (UPS) say they have flexibility to hold down employee earnings, given uncertain demand and an excess supply of labor. Retailers such as Kohl’s Corp. (KSS) report that elevated food and fuel prices have cut into paychecks, restraining shoppers.
“The biggest issue is that labor income is soft at a time when we’re getting no offset” from other sources, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Unlike in the early part of the recovery, stock-market losses are eroding wealth and home prices continue to decline, he said.
Standard & Poor’s 500 Index futures expiring in December dropped 0.4 percent to 1,121.20 at 9:54 a.m. in London, having earlier retreated 1.3 percent. The S&P 500 Index (SPX) has fallen 17 percent since this year’s high of 1363.61 on April 29. The S&P/Case-Shiller index of property values in 20 cities is down 31 percent from the pre-recession peak in July 2006.
Support from the government may shrink if Congress fails to extend payroll-tax cuts and unemployment benefits set to expire at the end of the year, and limited access to borrowing means Americans have few means to fund their purchases, said Feroli, a former Fed economist.
“It’s hard to see where consumers are going to get a lot of wherewithal to sustain strong spending,” he said. “It’s certainly a concern that, rather than sluggish consumption growth, we see flat or declining consumption.”
The stalled labor market and stagnant wages are easing one source of concern for Fed officials watching inflation.
“The painfully high unemployment rate is consistent with considerable slack or excess capacity in the economy, which tends to constrain wage growth,” Federal Reserve Bank of Atlanta President Dennis Lockhart said during a Sept. 27 speech in Jacksonville, Florida.
“You are familiar with the term wage-price spiral. I don’t see any prospect of such a development in the foreseeable future, as long as unemployment remains high and longer-term inflation expectations remain well-anchored,” he said.
The worsening outlook for incomes will cause “continued pressure on home prices and on the stock market,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. Corporate sales may be hurt as demand cools, and there may be more withdrawals from retirement plans and higher use of 401(k) loans, he said.
Sales at some luxury stores may be hurt because “at the margin, the upper end of the middle class will probably feel less inclined to spend extra money,” he said. Among chains catering to “the lower end of the earnings totem pole,” discounters including Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) may fare better as shoppers trade down.
“Perception is reality from the standpoint of consumers and investors,” Polley said. “We need people to start feeling good about themselves.”
Bad Time to Buy
The Bloomberg Consumer Comfort Index slumped in the week ended Sept. 25 to the second-lowest level on record as Americans grew more concerned with their financial situation. The share of households saying it was a bad time to buy goods and services was the highest in three years.
A record 91 percent of consumers expect that growth in their incomes will match or fall behind price gains in the coming year, according to participants in the September Thomson Reuters/University of Michigan sentiment survey, which dates back to 1978.
Until people see their wages or the labor market get better, they will be “spending on necessities, not desires,” said Chris G. Christopher, senior principal economist at IHS Global Insight in Lexington, Massachusetts.
Tamra Loomis, a graphic designer and single mother of two boys, uses the Internet at her parents’ home, grows vegetables to trim grocery bills and takes advantage of coupons to shop. She makes $17 an hour and hasn’t had a raise since September 2008, three months after she started working at a sign company in Antioch, California, about 40 miles northeast of San Francisco.
The owner has twice denied her request for higher wages and in January cut the hours for her and the company’s other employee to 30 a week from 40, she said.
“My boss says because of the economy, things are tight, business is slow,” so “at this point, I’m paycheck to paycheck,” said Loomis, 32. “A lot of people aren’t hiring, and when they are, they offer even less than what I make. It’s really difficult.”
The jobless rate held at 9.1 percent in September for a third consecutive month, while payrolls grew by 50,000 after no change in August, according to the median forecast in a Bloomberg News survey of economists ahead of Labor Department figures due Oct. 7.
The unemployment situation is a “national crisis,” Bernanke said in response to questions after a speech Sept. 28 in Cleveland. Obama is campaigning for congressional support of a $447 billion jobs program centered on rebuilding infrastructure and expanding payroll-tax breaks for workers and employers.
“It’s certainly easier to focus on the greater sources of distress,” BNP’s Coronado said, referring to officials’ concern about Americans who are out of work. “But the bigger bulk of economic momentum is going to be driven by people who are employed and how they feel about their prospects.”
Consumer spending rose at a 0.7 percent annual rate in the second quarter, less than half the 2.1 percent pace in January- March, the Commerce Department reported last week. Gross domestic product expanded less than 1 percent on average in January-June, the worst six months of the recovery.
“The economy isn’t growing fast enough to boost job growth to increase incomes,” said Omair Sharif, an economist at RBS Securities LLC in Stamford, Connecticut. “Most workers don’t have a lot of sway in demanding higher wages unless they have very specialized skills.”
‘Hold the Line’
Werner Enterprises Inc. (WERN), an Omaha, Nebraska-based truck operator, has “been able to hold the line on our salary, wages and benefits costs,” John Steele, chief financial officer, said on a Sept. 8 analyst conference call. In today’s “uncertain” economic environment, “there’s a little less pressure on driver pay than there was a couple of months ago.”
UPS, the Atlanta-based package-delivery company whose shipments make it an economic bellwether, has “a very reasonable contract in place that will show modest, below- inflation increases in wages” for drivers, Chief Financial Officer Kurt Kuehn said on a July 26 teleconference. “We’ve got a good outlook for the cost structure.”
Employees cannot hope for more bargaining power anytime soon, said Harry Holzer, a professor of public policy at Georgetown University in Washington and former chief economist at the Labor Department. Through August, the U.S. had recovered only about 1.89 million of the 8.75 million jobs lost as a result of the recession.
“There is so much slack, it will keep earnings from rising very much,” he said. “It will take most of this decade” to repair the damage “unless there is a big spurt in hiring.”