Economists often see fat pay hikes as a danger signal flashing the onset of inflation. But with global economic malaise threatening to engulf the U.S. economy, today's strong wage gains are more likely to help than hurt. The reason: They put money in the pockets of consumers, whose continued spending has been the primary engine of domestic growth.
In fact, the real danger right now may lie with the sharp surge in job cuts that began last summer. If Corporate America overreacts to the global slowdown by slashing payrolls and employees panic, consumers may put away their wallets. "If too many companies cut back because profit growth is slowing, consumers may give up and we'll have a recession," warns David A. Wyss, chief economist at Standard & Poor's DRI.
Certainly, workers have been reaping the benefits of tight labor markets lately. The nationwide scarcity of workers has prompted employers to bid up hourly wages by 2.4%, after inflation, in the 12 months ended in September, according to the Bureau of Labor Statistics (chart). That's nearly double the wage increase for the same period in 1997, and it's the strongest gain since the early 1980s. However, the trend isn't as inflationary as it seems. Only half of the jump stems from actual pay hikes. The other half simply reflects low increases in consumer prices, which have boosted workers' purchasing power.
NEGATIVE SAVINGS. While employment growth has begun to slow in recent months, nudging up the jobless rate to 4.6%, jobs remain relatively easy to find. In fact, nearly 2 million jobs have been added so far this year, according to the BLS. The result: Americans are flush with cash and are willing to part with it, despite all that's going on overseas and the gyrations of the U.S. stock market. Consumers purchased nearly 5% more, even after adjusting for inflation, in the 12 months ending in September than they did in the same 1997 period, according to the Commerce Dept.
Indeed, families spent more than their incomes in September, nudging the savings rate into the negative for the first time since Commerce started collecting the figures in 1959. Consumers' spending spree contributed the bulk of the growth in the economy during the third quarter, helping to lift gross domestic product by a surprising 3.3%. With the trade deficit widening rapidly, manufacturing activity slowing for the past five months in a row, and capital spending slackening, the economy would be in a real downdraft were it not for freewheeling consumers.
The key question: Will it continue? While consumer confidence remains high, it has recently started to slip, according to surveys done by the Conference Board. So, too, has the confidence of executives--and far more dramatically. The bleak outlook of CEOs is already being reflected in layoffs. By the end of October, announced job cuts totaled 523,000, up a stunning 60% over last year, according to Challenger, Gray & Christmas Inc., a Chicago outplacement firm.
FLASHING LIGHTS. Of course, it's every executive's job to keep the company competitive and profits growing. But there's also a catch-22: If most employers retrench to boost net income, consumers will stop spending, the economy will nose-dive, and no one will make money. "The biggest danger now may be companies cutting back too much," says Nicholas S. Perna, chief economist at Fleet Financial Group Inc.
Perna and other experts think some of the economic negatives may be starting to ease. The global crisis seems to be stabilizing. And the dollar is declining, which should lessen the damage from the trade deficit. As a result, the anticipated slowdown in GDP may not prove bad enough to drag the U.S. economy into recession. But unless consumers keep their wallets open, the flashing lights down the road could quickly turn from yellow to red.