Wages Bolster Spending as Americans Extend Hours: Economy

Consumer spending in the U.S. is rising even though hourly pay isn’t. The reason: More Americans are finding jobs and putting in longer hours in the office and on the factory floor.

Wages and salaries -- the total paycheck for all Americans -- climbed 2.2 percent in the 12 months through March after adjusting for inflation, according to calculations by RBS Securities Inc. economist Omair Sharif. Earnings per hour on average dropped 0.7 percent in real terms over the same period, according to Labor Department data.

Incomes are getting a boost from job growth and gains in hours, which will give Americans the means to increase spending at the fastest pace in six years, say Sharif and Pierpont Securities LLC economist Stephen Stanley. That’s allaying concern that hourly earnings, a widely watched measure of consumer buying power, are stagnating.

“If you were just to look at the average hourly earnings number, it would suggest pretty dire consequences for consumption,” Sharif said. “If you look at wages and salaries, consumption should be able to grow.”

Sharif predicts consumer spending, which accounts for about 70 percent of the economy, will rise 2.5 percent this year, the most since a 2.9 percent increase in 2006. Stanley, the most accurate forecaster of personal spending in the two years through March, according to data compiled by Bloomberg News, is even more bullish, seeing a gain of 2.5 percent to 3 percent.

Bloomberg Median

Their estimates are more optimistic than the 2.1 percent median forecast in a Bloomberg survey of 75 economists early last month. Household spending rose 2.2 percent in 2011, up from 2 percent the year before.

In the five years before the last recession began in 2007, spending advanced 2.9 percent on average, Commerce Department data show.

Recent gains in spending have propelled stocks of companies that depend on discretionary purchases. The Consumer Discretionary Select Sector SPDR Fund (XLY), which includes Starbucks Corp. and Nike Inc. (NKE), has advanced 14 percent this year through yesterday, compared with an 8.4 percent gain in the broader Standard & Poor’s 500 Index.

Stocks fell today amid concern Greece’s bailout is unraveling as the nation struggles to form a coalition government. The S&P 500 dropped 0.7 percent to 1,354.58 at the close of trading in New York.

Elsewhere, April retail sales in the U.K. fell by the most in more than a year as poor weather and consumer caution slowed demand.

Macy’s Sales

Macy’s Inc. (M), the owner of its namesake and Bloomingdale’s department stores, today reported first-quarter profit that topped analysts’ estimates as sales at stores open at least a year advanced 4.4 percent. The Cincinnati-based retailer also boosted its same-store sales forecast to about 3.7 percent this year from a previous estimate of 3.5 percent. Shares fell after it failed to boost its yearly earnings forecast from February’s projection.

Wage growth is especially important as households seek to pay down debt accumulated during the bubble years that preceded the recession, Stanley said.

“Consumer spending is going to live and die with income growth because consumers aren’t likely to take on a lot more debt,” said Stanley, who is also based in Stamford.

Americans are also unlikely to dip further into savings, said Michael Carey, the chief economist for North America at Credit Agricole CIB in New York.

Saving Rate

The saving rate, which shows how much disposable personal income consumers choose to keep, fell to 3.8 percent in March from 4.7 percent at the end of 2011.

“I’m looking out at employment gains as the major driver of income gains that should support the consumer,” said Carey, who predicts consumer spending will advance about 2.5 percent this year.

Joshua Shapiro is among economists less optimistic about the outlook.

“The underlying support for spending is going to be fairly weak,” said Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “The labor market recovery is still patchy and not particularly strong, and I also think that people are going to be increasingly cognizant of the fact that savings need to be increased.”

Consumer Confidence

Carey says a decline in gasoline prices may bolster consumer confidence and leave Americans with more money to spend on other goods. The average price of a gallon of gasoline fell to $3.75 on May 8 from a peak this year of $3.94 in early April, according to AAA.

The pickup in wages comes as the economy adds more jobs and workers put in more hours. Payrolls have increased by 1.82 million in the past 12 months, helping reduce the unemployment rate to 8.1 percent from 9 percent.

Meanwhile, the average workweek for private employees lasted 34.5 hours in April, up from a recession-low of 33.8 hours. It averaged 34.6 hours in the five years leading up to the recession.

“The bulk of the improvement that we’ve seen in labor income over the last couple quarters is coming not so much because wages are accelerating,” Stanley said. “It’s coming from the fact that more people are working, and those that are working are working a little longer.”

Payrolls and Hours

The Commerce Department’s data on wages and salaries reflect the increase in payrolls and hours, while Labor Department figures on average hourly earnings do not.

An improving labor market has bolstered consumer confidence. The Bloomberg Consumer Comfort Index reached a four- year high in early April. Other measures also improved, with the Thomson Reuters/University of Michigan sentiment gauge reaching a one-year high last month, and the Conference Board’s index hovering near the one-year high reached in February.

Among those feeling better about the economy is Christina Carroll, 24, who landed a new job at San Francisco-based Demandforce Inc., selling software to dentists as an account executive.

She said she expects to earn $80,000 to $90,000 as long as she meets her sales quota -- compared to the $53,000 she made last year at her sales position at a real-estate search engine.

Carroll said she sees herself dining out more often, buying new clothes, purchasing an Apple Inc. iPad and taking a trip with her mother to Paris for Christmas.

“I can finally spend money on what I want,” she said. “I used to pay all my bills and have almost nothing left to spend - - there was a week I had $40 to live on. After my first paycheck, I’m going on a big spending spree.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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