U.S. Expansion May Be First Without Income Recovery (Update1)

By Vivien Lou Chen

July 21 (Bloomberg) -- For six years, Tom Stechmiller's 2 percent annual pay raises didn't keep up with increases in the cost of living. Now, with prices rising faster and the economy slowing, his wages have been frozen.

``I'm terrified,'' said the 47-year-old father of two, an embalmer for Service Corp. International from the Chicago suburb of Berwyn, Illinois. ``This isn't the American dream.''

The current U.S. economic expansion is the first in 60 years that may end before many Americans have recovered from the last slowdown. Annual family incomes adjusted for inflation have grown just 0.8 percent since the end of 2001 even as the economy expanded an average 2.7 percent a year, leaving households little cushion to absorb higher food and fuel prices.

``The average family hasn't made up for lost ground,'' said James Glassman, senior economist at JPMorgan Chase & Co. in New York. ``We're discovering people aren't protected from inflation like they used to be.''

Median U.S. family income, adjusted for inflation, was $58,407 in 2006, according to the most recent Census Bureau data, down from $59,398 in 2000. Competition from low-wage countries such as China, combined with the waning power of organized labor, kept a lid on compensation during the latest expansion.

``The world has seen, over the past 20 years, an increase in the supply of labor,'' said Robert Solow, a winner of the Nobel Prize in economics who's now at the Massachusetts Institute of Technology. ``When you have a big increase like that, the wages of the person in the middle are likely to be held down.''

Economic Impact

Now, as prices pick up, the deterioration in income growth means households are likely to cut spending, restraining the economy. Economists don't anticipate annualized growth to breach 2 percent until the third quarter of 2009, according to a monthly Bloomberg News survey.

The Labor Department reported July 16 that consumer prices jumped 5 percent in the year to June, the most in 17 years. That pushed the so-called Misery Index, which adds inflation to the unemployment rate, to 10.5, a level unseen since 1993, the year Democrat Bill Clinton was inaugurated as president after campaigning on promises to revive the economy.

The lack of wage growth during George W. Bush's presidency means Democrats are likely to make gains in this year's election, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

``People vote their pocketbooks,'' he said. ``They're likely to take out their problems on the incumbent party. It's going to be pretty hard'' for Republican presidential candidate John McCain ``to escape Bush's mantle on the economic front.''

1998 Gain

The last time households significantly gained on inflation was 1998, when median income grew by 3.4 percent.

As Stechmiller got 2 percent raises the last six years, his monthly natural-gas bill more than doubled to $199, gasoline increased to $4.20 a gallon and Chicago's sales tax rose to the highest of any major U.S. city: 10.25 percent.

Now with a three-year pay freeze, he's pondering how to keep up with expenses.

``I can't imagine how I can keep a roof over my head,'' said Stechmiller, who lives in an 88-year-old brick bungalow with his wife, a part-time teacher's assistant, and family.

The outlook for workers like him isn't likely to improve, with economists saying the economy is close to a recession. Each of the five contractions since 1969 brought declines in inflation-adjusted median income.

Recession Risk

U.S. growth will slow in the second half of the year as unemployment rises and stock-market declines hurt household wealth, according to an index of leading economic indicators. The Conference Board's gauge declined 0.1 percent in June, after a revised 0.2 percent drop the prior month, a report from the New York-based research group showed today.

What's more, a recession in 2008 would be accompanied by accelerating prices, a toxic combination mostly absent since 1980, when inflation topped 14 percent.

Labor's influence has crumbled since then, helping prevent wages from chasing prices higher.

``Labor now is so weak that it doesn't have the bargaining power to even keep up with inflation,'' said Mark Weisbrot, co- director of the Center for Economic and Policy Research.

1970s Price Spiral

Modest pay gains give Fed Chairman Ben S. Bernanke confidence the U.S. will avoid a repeat of the 1970s, when compensation for inflation became embedded in contracts and price expectations soared.

``We see little indication today of the beginnings of a 1970s-style wage-price spiral,'' Bernanke said in a speech last month.

Businesses in most of the U.S. reported moderate or limited wage growth in the June 11 Fed Beige Book survey of economic conditions.

``From the point of view of business, Wall Street and the central bank, this is great because part of the threat of inflation has been eliminated,'' Weisbrot said. ``From the point of view of the vast majority of people, it's a big step backward.''

That's the direction Mark Ivankovits had been going since 2003. The journeyman electrician from Allentown, Pennsylvania, said his annual earnings fell in five years to about $45,000 from $65,000 and his hourly wage fell between $6 and $7 as he drove up to 200 miles a day looking for work.

``I've been treading water for the last few years,'' said the 46-year-old father of two.

In June, Ivankovits said, he landed a steady job only 15 minutes from home: one that pays exactly what he earned in 2003.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: July 21, 2008 11:08 EDT

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