July 18 (Bloomberg) -- Consumers in the U.S. are spending more closely in line with their incomes than in any expansion in the past 48 years, learning the lesson of the last recession that living beyond your means often ends badly.
The CHART OF THE DAY shows the correlation between wages and purchases in the economic rebound that started in June 2009 is 94 percent, the highest of the seven expansions since 1965, according to data compiled by economists at RBC Capital Markets in New York. That’s 18 percentage points above the closest period, 1971-1973, and 88 percentage points higher than the 2002-2007 cycle, when consumers tapped home equity during the housing boom to finance spending.
“The consumer has really cleaned up their balance sheet -- they’re growing consumption based on the rate of growth of their earnings, which at the end of the day builds a more solid foundation,” said Jacob Oubina, a senior economist at RBC. “We’d just like to see a little bit more credit usage, because it’s been non-existent.”
The correlation between what Americans earn and buy is a sign that the consumer purchases that make up about 70 percent of the economy are a sustainable component of the recovery. The easing in lending rules that is now taking place is a positive development that could encourage consumers to purchase more big-ticket items such as cars and houses, giving spending and the economy a needed boost, said Oubina.
Nonetheless, easier credit alone won’t be enough to propel economic growth past 3 percent, said Oubina. It will also require bigger gains in wages and an improving labor market, he said.
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