Yellen Spending Mix Lacks Ingredient of Higher Pay: EconomyShobhana Chandra and Jeanna Smialek
Janet Yellen and her Federal Reserve colleagues are finally succeeding in their efforts to generate higher inflation. Now they must do the same for wages to prevent U.S. households from getting squeezed.
The price measure tracked by the central bank rose 1.8 percent in May from a year earlier, the biggest 12-month gain since October 2012, and just shy of policy makers’ 2 percent goal, data showed yesterday. After adjusting for inflation, consumer spending dropped for a second consecutive month.
Americans are paying more to fill up their grocery carts and cars’ fuel tanks, leaving less for discretionary items, including the latest fashions, restaurant meals and movie tickets. While rising stock and home prices are shoring up finances for higher-income households, fatter paychecks would allow spending by the majority of consumers to shift into a higher gear and stimulate economic growth.
“Consumer spending could struggle in an environment where wages don’t accelerate, particularly if inflation starts to move up,” said Emanuella Enenajor, an economist at Bank of America Corp. in New York. “We’re looking for that hand-off from the wealth-effect to an actual underlying increase in wages and income to support consumer spending.”
The central bank’s preferred measure of inflation has been below its goal since April 2012, causing concern that disinflation will make it difficult for borrowers to pay off debts and for businesses to boost profits. Fed Chair Yellen has said inflation persistently below target could pose risks to economic growth.
She said last week that she would “worry about downside risk to consumer spending” should wages fail to accelerate even as the labor market improves.
Commerce Department data yesterday showed those concerns weren’t misplaced. Consumer purchases, after accounting for the influence of prices, fell 0.1 percent in May after a 0.2 percent decline a month earlier, signaling the rebound in growth this quarter will be more muted than previously projected.
The economy contracted in the first quarter at a 2.9 percent annualized rate, the most since the depths of the recession that ended in June 2009, the agency reported this week. Consumer spending was the weakest in five years.
“My own expectation is that as the labor market begins to tighten, we will see wage growth pick up some,” Yellen told reporters on June 18 after the Fed’s policy meeting. “If we were to fail to see that, frankly I would worry about downside risk to consumer spending.”
Wages and salaries have increased 2.5 percent year-over-year on average since the last recession, compared with 4.3 percent in the previous expansion. Consumer spending, which accounts for almost 70 percent of the economy, has grown an average 2.2 percent in this recovery, lagging behind the 3 percent advance in the prior one.
Vilma Martinez said she hopes efforts to raise the minimum wage will give her some extra spending money. She earns about $1,200 a month at her 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,” said Martinez, 52, who can’t recall when she last got a raise or took her three kids to the movies. “It’s hard to pay all the bills.”
The Thomson Reuters/University of Michigan’s final consumer sentiment reading for June issued today showed expectations for the year ahead were little changed as most households said wages will probably rise less than inflation, leading to lower living standards. Overall, confidence increased from the prior month based on more upbeat views on the current state of the economy.
Stocks rose, paring a weekly drop for the Standard & Poor’s 500 Index, as equities reversed losses in the final hour of trading. The S&P 500 climbed 0.2 percent to 1,960.96 at the close in New York.
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 at the pump are at the highest level for this time of year in six years, AAA data show.
Yesterday’s consumer spending report 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.
One reason for the cutbacks is that Americans want to have more cash available for a rainy day. The nation’s saving rate jumped to 4.8 percent in May, the highest since September, yesterday’s Commerce Department data showed.
Some economists dismissed the increase as a fluke because other figures suggest consumers are becoming less concerned about the economic outlook.
It doesn’t “add up,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. “Consumer confidence is at a cycle high, and consumption is declining. You also have a situation where real disposable income is rising significantly over the first five months of the year, and consumption is falling. It’s sort of like, which of these is not like the other?”
Nonetheless, compared with other recoveries, the increase in incomes is unimpressive, said Eugenio Aleman, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
The current economic expansion, compared with recoveries of at least similar length since 1960, is the only one that has seen gains in spending outstrip incomes, Aleman’s research shows.
Even with more people finding work and some gaining the confidence to borrow, “we’re getting to a point where we need wage gains” to accelerate, said Aleman. “We don’t expect wage growth to be strong until next year.”
Higher stock prices and increased property values have also underpinned demand, mainly benefiting wealthier Americans. Earnings are more important for lower-income households, especially as rising gas and food prices take a bite out of their budgets.
AutoZone Inc., a Memphis, Tennessee-based retailer of automotive parts, is among companies seeing customers hurt by costlier gasoline.
“One recent additional pressure point has been the increase in gas prices,” Chief Executive Officer William Rhodes said on an earnings conference call in May. “Based on the dialogue we see across retail, the low-end consumer seems to be particularly challenged.”
Forty-nine percent of consumers in a June survey by RBC Capital Markets LLC in New York said they would need an increase in wages to step up spending, up from 46 percent a year ago. A smaller share than last year, 17 percent versus 19 percent, said it would take an improvement in hiring. This year, 6 percent cited gains in stock prices and 3 percent pointed to rising home values.
“The consumer has, right now in their wallets, the ability to go out and spend, but they lack the confidence to do that,” said Tom Porcelli, chief U.S. economist at RBC in New York and the second-best forecaster of personal spending in the past two years, according to data compiled by Bloomberg. “One of the key ingredients that’s missing is confidence in their income growth and job growth.”
Some long-term unemployed have begun finding work as demand improves, suggesting employers may be opting to widen their applicant pool rather than raise compensation. A tighter job market may eventually prompt employers to pay more.
Bigger across-the-board advances in incomes are unlikely within the next three years, according to Porcelli, though he’s seen “nascent signs of wage growth in some pockets.”
Yellen said she remains confident consumer spending will continue to grow at a “healthy rate.”
“In part, that’s premised on some pickup in the rate of wage growth so that it’s rising greater, more than inflation.”