Household Finances Look Better

In addition to the refreshing redolence of more jobs, consumers are also inhaling the sweet smell of extra cash. The recent upturn in hourly and weekly pay is giving households the wherewithal to keep spending (chart). In addition, better income growth, along with the flood of mortgage refinancings over the past 1 1/2 years, has improved the financial footing of many consumers.

The average hourly wage in the nonfarm sector increased by 0.6% in May, to $10.83. Since hitting bottom in mid-1992, wage growth is definitely on an upward trajectory. Hourly pay has risen by 2.8% over the past 12 months, compared with a 2.3% advance in the preceding year.

But while the pickup in pay is putting more money in consumers' pockets, it shouldn't touch off any inflation alarms. That's because gains in productivity are offsetting some of the increase in wages. As long as unit labor costs remain low--and businesses' drive to increase efficiency makes that seem likely--then a slight pickup in wage growth will result in little, if any, cost-push pressure on inflation.

The increase in hourly pay, coupled with the longer workweek, caused a huge 1.7% jump in the average weekly paycheck. Weekly earnings are rising at an annual rate of 4.7% so far in the second quarter--the fastest quarterly pace in two years. Stronger income growth is a big reason why real consumer spending is on track to grow at a healthy clip of about 3% this quarter, following its disappointing 1.2% pace in the first period.

The better income picture also explains why consumers are once again pulling out their plastic and saying "charge it." After being taboo for two years, borrowing is in vogue again. Consumer installment debt grew by a large $2.3 billion in April, after an even stronger $3 billion gain in March. Revolving debt, which includes credit cards, is leading the new borrowing binge.

Installment debt had dipped to a two-year low last August as economic uncertainties, mainly job worries, caused consumers to put away their credit cards and postpone purchases of big-ticket items. Since then, though, credit outstanding has ballooned by some $23.5 billion, to $754 billion (chart).

Will all this new debt sour the outlook? No. The increase in borrowing has been more than matched by income growth. Installment debt as a percent of disposable income has stayed at 16.3% to 16.5% for a year now. That's down sharply from the ratio's peak of 18.8% in 1989, and it suggests that heavy debt is less of a squeeze on household budgets.

With the upturn into its third year, consumers and businesses clearly need some energized data to shake away the perception that this economy is flagging. The latest readings from the labor markets should provide that necessary jolt. In the world of economic brews, the May employment report was anything but decaf.