Can U.S. Economic Growth Speed Up If Wages Keep Stagnating?

Consumers spent more in May than they have in six years, before the financial crisis and Great Recession sent the U.S. economy into a tailspin. Survey data compiled by Gallup show that Americans reported spending an average of $98 per day — $10 more than the April average and well above May’s $90. In order to track consumer spending trends, the research firm measures Americans’ daily self-reported consumer spending at retail stores, gas stations, restaurants, and online, excluding money put toward normal household bills and major purchases such as homes and cars.

By and large, the firm’s data has served as an accurate representation of the recovery of the American consumer, which — like the recovery of the broader U.S. economy — has been hit by a number of setbacks. But while Gallup’s data serve as a broad barometer of the health of the American consumer, it is only a small narrative in a larger, more complex story. The May self-reported spending figure shows consumers gathering confidence in the economic recovery. However, other data — specifically the Department of Commerce’s Personal Income and Outlays report, the first-quarter gross domestic product figure, jobs statistics, and measures of economic confidence — add more nuance to that spending story.

GallupConsumer

Source: Gallup

The available data on the health of the U.S. economy, wage growth, job creation, and public sentiment suggest that a number of hurdles stand in the way of a complete recovery.

“Though Americans’ views of the economy on a monthly basis have been flat throughout 2014, the May increase in spending suggests the possibility of some economic improvement,” Gallup’s Justin McCarthy wrote of May’s figure. And as he indicated, the research firm’s economic confidence measure has hardly changed throughout 2014. Measuring minus 15 in the last full week of May, the index recovered from the massive dip it took amid October’s shutdown of the federal government. Yet that is still a poor reading, indicating that few Americans deem the economy to be in good shape or view economic conditions as improving.

The Commerce Department’s Personal Income and Outlays report showed that American consumers decreased spending in April for the first time in a year. Consumer spending, which accounts for 70 percent of overall economic activity, fell 0.1 percent in April. That decline followed March’s 1 percent surge, which was the largest increase recorded in more than four years. Given that the data is released with a one-month lag, it could be argued that this drop should not be of concern because Gallup’s data showed obvious strength in consumer spending patterns in May. The research firm’s self-reported spending data for April were not weak, even though at $88 per day, the self-reported spending figure showed little yearly growth.

“The April spending estimate can be considered a mixture of positive and negative news for the economy,” said McCarthy, describing Americans’ reports of daily spending in April. “On the positive side, the $88 average remains on the high end of what Gallup has measured historically, and is clearly above the depressed spending that represented the ‘new normal’ during the recessionary and post-recessionary period of 2009 through 2012. On the negative side, the April estimate is no higher than the estimate from March 2014 or April 2013, suggesting no further growth in spending.”

Alongside the drop in spending, wages rose slightly in April, meaning Americans saved more that month: a positive for personal finances but a negative for the economy. The savings rate rose to 4 percent of after-tax income, an increase from March’s 3.6 percent rate. Contrary to long-standing patterns, consumers reduced spending on durable goods like automobiles by 0.5 percent, a drop that followed a sizable 3.6 percent increase in March. In addition, spending on services, including utility bills, dropped 0.1 percent, reflecting the end of the exceeding cold winter that resulted in higher heating bills for many households across the United States. In April, consumers purchased more nondurable goods, with spending increasing 0.1 percent.

But while many economists expected consumer spending to have stabilized in May, consumer sentiment declined last month as many Americans felt the financial pressures of stagnant wages and higher inflation. According to Thomson Reuters/University of Michigan’s final reading, consumer sentiment dropped to 81.9 in May compared to 84.1 in April. That decrease ended four months of improving sentiment, with confidence rising to the highest level since 2007, before the recession began.

Strong consumer spending is essential for the recovery of the American economy. Because government and business spending have largely remained remained weak in recent quarters, the economy has been heavily dependent on consumer spending, which accounts for approximately 70 percent of gross domestic product in the United States, to fuel growth. With first-quarter GDP contracting at 1 percent rate thanks to lagging exports, low government spending, as well as the frigid winter weather’s chilling grip on construction and manufacturing, consumer spending did much of the heavy lifting.

In the Commerce Department’s latest revision of first-quarter GDP, consumer spending was upwardly revised to a 3.1 percent increase, slightly above the 3 percent growth rate initially calculated. However, Americans are generally still hesitant about increasing expenditures beyond everyday necessities, keeping sales weak for a number of industries. Consumer caution has left business equally cautious regarding investments, especially in new employees. After taxes and without inventory valuation, corporate profits totaled a seasonally adjusted annual rate of $1.88 trillion, down from the previous quarter’s $1.905 trillion.

The good news is that incomes inched forward again in April, rising 0.3 percent, according to the Commerce Department’s report. And while that gain was smaller than March’s 0.5 increase, it does represent the fourth consecutive monthly increase. Plus, April’s wage gain was paired with the largest payroll increase in two years, with U.S. employers creating 288,000 jobs.

While the recent stock market rally and rising home prices have put many Americans in a better position to increase their outlays, other sectors of the American population are struggling. Consumer spending has been held back to some degree by the slow-to-recover labor market and ongoing wage stagnation. As the U.S. economy continues to strengthen, economists expect employers to continue growing payrolls throughout 2014, which will keep the unemployment rate trending downward.

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