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Wages Hold the Key to This Recovery

The news isn’t great on the consumer spending front. Purchases by U.S. consumers, which account for about 70 percent of the total economy, increased just 0.2 percent in May. That follows zero growth in April and is less than the 0.4 percent that economists were predicting for last month.

On the other hand, it appears that people have more money in their pockets. Disposable personal income rose 0.4 percent last month, or about $55.6 billion. Over the first five months of 2014, nominal private wages and salaries are up 5.6 percent at an annual rate, according to Neil Dutta, chief U.S. economist at Renaissance Macro Research. Nominal disposable income is up 5 percent.

Rather than spend that money, though, Americans are socking it away and paying down debt. The savings rate is running at 4.8 percent, up from 4.1 percent in December. With credit tight, consumption is much more a function of wage growth these days than during previous recoveries.

“Wages are the story right now,” says Jacob Oubina, senior U.S. economist at RBC Capital Markets (RY). “They’re the end all [and] be all of the current expansion.” During the previous recovery, from 2002 to 2007, the correlation between wage growth and personal consumption was just 12 percent, says Oubina. For this recovery, it’s been 95 percent, he says.

That means you can draw a pretty straight line between GDP expansion and wage growth. Over the past 12 months, average weekly earnings have risen about 2 percent. Which is right around where GDP is running.

Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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