Tepid Wage Growth Restrains Economy


The U.S. labor market continued to improve in August, though not as much as analysts’ had predicted. Employers created 142,000 positions and the unemployment rate edged down to 6.1 percent, because a bunch of people left the labor force. Before you start worrying the recovery is falling apart, consider this: But for a lousy January (when severe weather pervaded much of the country) and this jobs report, which may have been impacted by unusual events in auto manufacturing and retailing, this year has actually been a very good one for job creation. There have been 1.732 million jobs added in 2014, or an average of 215,375 per month. In the last 15 years, the U.S. has seen average monthly job gains of at least 200,000 in just one year (2005), so let’s not throw in the towel just yet. And taking a longer view, private-sector payrolls have grown by more than 10 million since the jobs recovery began in March 2010. According to the WSJ, “employers outside the government have added jobs for 54 straight months—the longest such streak on records back to 1939”.

Still, there are many problems that persist in the labor market, like 3 million people out of work for more than six months and a historically low participation rate, to name a couple. But perhaps the most vexing for the economy is that wage growth remains stuck at around two percent from a year ago. As a frame of reference, Americans usually see pay increases of about 3 percent during expansions, so the recent recovery, which officially began in June 2009, has been sub-par for growth as well as for wages.

Last week, the Federal Reserve has released its Survey of Consumer Finances for the year 2013. The central bank conducts these surveys every three years, so this is the first comprehensive update we have seen since the recovery has taken hold. There’s lots of fascinating information in the report about income distribution, but let’s cut the chase on the topic at hand: the median American family earned 5 per cent less in 2013 than in 2010 after inflation. (Don’t be distracted by the average, because the results of the top ten percent sway the results.)

And if you want to get really depressed, consider this: median income has declined about 12.4 per cent since the peak in 2004. One of the contributing factors to the consumer credit binge of 2004-2007 was that as incomes slowed, Americans borrowed more to cover the difference. And the housing and credit collapse that helped trigger the financial crisis has taken a big bite out of how much Americans are worth. Median net worth is still 40 per cent below peak. Or put another way by Matthew C. Klein of the Financial Times, “Adjusted for inflation, the typical American is no better off than she would have been in the early 1990s.”

If you are among the top 3 percent who has seen gains in income and net worth, these trends are bad for you too. The reason is simple: there are not enough high earners to carry the economy. We need a broader swath to enjoy growth so that they will spend more freely. The pokey wage growth explains why consumers have become thriftier during the recovery, resulting in GDP growth of about two percent annually, more than a full percentage point below the post-World War II average.

The weakness in consumer spending or the somewhat disappointing August Employment report does not mean that the economy has veered off track. In fact, there is evidence that housing, business spending, exports and government activity are all accelerating. But only when the broad consumer base, which accounts for about two-thirds of overall activity, more fully participates in the recovery, will the country return to trend growth.


  • DJIA: 17,137, up 0.2% on week, up 3.4% YTD
  • S&P 500: 2007, up 0.2% on week, up 8.6% YTD
  • NASDAQ: 4464, up 0.06% on week, up 9.7% YTD
  • 10-Year Treasury yield: 2.46% (from 2.34% a week ago)
  • October Crude Oil: $93.45, down 2.8% on week
  • December Gold: $1267.30, down 1.6% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.44 (from $3.58 a year ago)

THE WEEK AHEAD: More clues about consumer spending will be revealed with the release of the August retail sales report. Economists expect a jump in sales, boosted by cars and an increase in back-to-school shopping. Because how we feel about the economy can be related to how we spend, economists will also be eager to see the preliminary results of the University of Michigan September Consumer Sentiment survey.

Mon 9/8:

3:00 Consumer Credit

Tues 9/9:

Apple event: iPhone 6 and iWatch expected to be unveiled

7:30 NFIB Small Business Confidence

10:00 Job Opening and Labor Turnover Survey (JOLTS)

Weds 9/10:

Thurs 9/11:

8:30 Weekly Jobless Claims

Fri 9/12:

8:30 August Retail Sales

8:30 Import/Export Prices

9:55 Consumer Sentiment

10:00 Business Inventories