In their effort to stimulate the economy, Janet Yellen and her Federal Reserve colleagues are finally succeeding in generating higher inflation. Now the Fed is waiting for stronger growth to spur wage gains so U.S. households can spend more money.
Until then, workers are getting squeezed. The inflation measure tracked most closely by the central bank rose 1.8 percent in May from the previous year, the biggest 12-month gain since October 2012 and just shy of policymakers’ 2 percent goal, data released on June 26 showed. Yet after adjusting for inflation, consumer spending fell a second consecutive month.
Americans are paying more to fill their grocery carts and fuel tanks. The cost of food climbed 0.5 percent in May from the prior month, the most since August 2011, according to the Labor Department’s consumer price index. Gasoline prices are at the highest level for this season in six years, AAA data show. The June 26 consumer spending report from the Department of Commerce showed clothing purchases dropped 0.9 percent in May from the prior month after adjusting for inflation. Americans spent 0.4 percent less on meals outside the home, and receipts at movie theaters slumped 10.3 percent.
While rising stock and home prices are shoring up finances for higher-income households, fatter paychecks will allow more spending by most consumers. “Consumer spending could struggle in an environment where wages don’t accelerate, particularly if inflation starts to move up,” says Emanuella Enenajor, an economist at Bank of America (BAC). Yellen has said she’s confident that consumer spending will keep growing at a “healthy rate.”
Wages and salaries have increased 2.5 percent year-over-year on average since the last recession, compared with the annual 4.3 percent in the previous expansion, which lasted from 2001 to 2007. Consumer spending, which accounts for almost 70 percent of the economy, has grown an average 2.2 percent in this recovery, lagging the 3 percent advance in the prior one.
Workers have little power to bargain for higher wages in a labor market that’s still far from healthy. That some long-term unemployed have begun finding work suggests companies may be widening their applicant pool rather than raising compensation. Worker shortages may have to develop before employers pay more.
Vilma Martinez knows what it’s like to go without a raise. She says she hopes to see an increase in the minimum wage big enough to give her some extra spending money. She earns about $1,200 a month at two cleaning jobs, including one as an $8.75-an-hour janitor at Union Station in Washington. “I can’t afford to go shopping; there isn’t enough money left over,” says Martinez, 52, who doesn’t recall when she last got a raise or took her three kids to the movies. “It’s hard to pay all the bills.”
AutoZone (AZO), a Memphis-based retailer of auto parts, is seeing customers hurt by costlier gasoline. “Based on the dialogue we see across retail, the low-end consumer seems to be particularly challenged,” Chief Executive Officer Bill Rhodes said on an earnings conference call in May. Forty-nine percent of consumers in a June survey by RBC Capital Markets said they needed an increase in wages to step up spending, up from 46 percent a year earlier.
“The consumer has, right now in their wallets, the ability to go out and spend, but they lack the confidence to do that,” says Tom Porcelli, chief U.S. economist at RBC in New York. “One of the key ingredients that’s missing is confidence in their income growth and job growth.”
Another reason for the cutbacks in spending is that insecure consumers drove the savings rate to 4.8 percent in May, the highest since September, Commerce Department data show. “We don’t expect wage growth to be strong until next year,” says Eugenio Alemán, a senior economist at Wells Fargo (WFC). Porcelli is less optimistic. He believes bigger across-the-board advances in incomes are unlikely within the next three years.