Its About ‘Peak Debt’: Household Consumption Growth Shackled To Tepid Wage Gains


Two weeks ago we solved the mystery of America’s missing wage growth. Despite a steadily falling unemployment rate, gains in real wage growth have proven illusory since the crisis much to the chagrin of the Fed and now to Janet Yellen, who says that although a pickup in wages isn’t a “precondition” for the fabled rate liftoff, wage growth does remain “sluggish” suggesting “that some cyclical weakness persists.” As it turns out, four-fifths of American workers would likely agree because as we showed, for production and non-supervisory employees, wage growth is falling steadily:

Meanwhile, America’s bosses, the “supervisory” minority, have seen their pay rise swiftly of late:

Given this, we drew the following set of rather logical conclusions:

Yes – wages are growing, for those who least need said wage growth, the “people in charge.”


In other words, precisely all those economists who day after day repeat that, damn what reality says, wages are rising.


Well, guess what: they are absolutely right… when referring to their own wages! It is the small matter of everyone else’s wages that they are dead wrong about.


So the next time anyone asks why there is no broad-based pick up in consumer retail spending across the entire population, just show them the above charts.

It’s against this backdrop that RBC recently made a rather stunning discovery: wage growth matters when it comes to consumer spending (that piece of the economic puzzle that accounts for two-thirds of GDP growth). In fact, now that Americans have learned the hard way that taking the Lehman approach to leveraging household balance sheets can and will lead to financial ruin, wage growth matters far more than it used to. Here’s more from Bloomberg:

The link between earnings and consumer spending has been tighter in this expansion than in any other since records began in the 1960s, according to calculations by Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York.


Wages have become even more critical as households, still shaken after being caught with too much debt when the recession hit, remain unwilling or unable to tap home equity or let credit-card balances balloon to buy that new television or dishwasher. By not overextending themselves again, Americans are only spending as much as their incomes will allow, meaning that 70 percent of the economy is riding on how fast pay rises.


“In an environment where credit is not being used in a material way, the fate of wages matters,” Porcelli said. “They’re doing all of the driving from a consumption perspective.”


The correlation between growth in wages and consumer spending adjusted for inflation stands at 0.93 since June 2009, when the recovery began, according to Porcelli. A reading of 1 means they move in the same direction all the time, zero means there is little relationship and minus 1 means they continually diverge.

So the correlation is nearly perfect at a time when 80% of the employed labor force are seeing their wage growth heading in the wrong direction which seems to explain why “low-income” respondents to the UMich Consumer Sentiment survey were feeling decisively less optimistic about their spending plans this month:

Consumer optimism slipped in early March among lower and middle income households (-6.5% from February) while confidence improved among households with incomes in the top third (+3.2%)…


Among those with incomes in the top third, strong gains were concentrated in the near term outlook for the economy and buying plans.

We would suggest that this does not bode well for Richard Fisher’s “epicenter” of economic prosperity going forward.