KEY DATA: Inflation Adjusted Disposable Income: +0.1%; Inflation Adjusted Consumption: -0.2%
IN A NUTSHELL: “The lack of wage gains is keeping consumers from spending more money.”
WHAT IT MEANS: The constraining cycle of minimal wage gains leading to minimal consumption increases continues. Households saw their incomes rise modestly in July as the increase in wages and salaries was the slowest this year. Adjusting for inflation, the rise was barely perceptible. Real disposable personal income has increased by 2.6% over the year, enough to drive decent but not great consumer spending. In July, households decided to go on a shopping vacation. They spent little but some of that may be due to the relatively mild winter that reduced air conditioning needs. Utilities are part of services spending and that component, which is two-thirds of all consumption, was flat. Also, while vehicle sales were strong, they did not come close to the robust pace posted in June so spending on durables was off sharply.
Will consumption rebound? The likelihood is yes as the University of Michigan’s Consumer Sentiment Index increased in August as households are more optimistic about their economic conditions. However, they remain somewhat uncertain about the future. A sharp rise in the Chicago Business Barometer adds to the indicators showing that the manufacturing sector is improving. That is likely being led by better consumer spending, even if the government is not yet finding that is happening.
MARKETS AND FED POLICY IMPLICATIONS: We need better consumer spending but we cannot get it until wages actually rise. This is the trap we are in and it is not resolving itself quickly. Indeed, businesses remain convinced they can get the perfect candidate at the price they think they should pay despite the growing number of job openings. The disconnect in this economy is between what an employer wants to pay and what an employer needs to pay to get the worker they want. In the business community, which is a firm believer in the market economy, there is a belief that the labor market doesn’t follow the laws of supply and demand. In economist’s parlance, employers think that the labor supply curve is flat so they can pay a constant price for any number of workers they want. The high unemployment rate of the past six years allowed that concept to take hold since it was basically accurate. But with excess labor supply diminishing, a normal shaped labor supply curve is reappearing and that means to get more workers, you have to pay more. If you don’t, the opening will go unfilled. Markets work, even the labor market, and while wages may be sticky downward in a recession, as we approach full employment, they will go up. The longer businesses take to recognize that wages need to be increased, the faster they will likely rise when that recognition sets in. On that positive note for workers let me say:
Have a safe and enjoyable Labor Day Weekend!