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Economy in Brief

Higher Prices Erode U.S. Wages And Threaten Consumer Spending
by Tom Moeller  May 3, 2011

Reported Friday was a hefty 0.6% gain in March disposable personal income. As we noted then, the strength of the nominal increase was limited to an outsized 2.7% rise in rental income, the third consecutive monthly such gain. Wage and salary growth, however, remained roughly stable at a moderate 0.3%. In contrast, prices rose a considerable 0.4%. The simple math behind this report is that adjusted for inflation, wage growth has turned negative in 2011.

The slight decline in real wages this year resulted from higher energy and food costs. For the quarter real wages fell at a 0.2% annual rate after increasing 0.4% during all of last year. Of course, if the lift to inflation subsides in coming months, real incomes would be bolstered. In Q1, however, real spending power is falling.

So far, consumers have ignored the shock. Real personal consumption expenditures rose 0.2% in March and at a 2.7% annual rate for Q1.Consumers have been able to resist the need to restrain spending, due to a high savings rate. During Q1, it stood at 5.6%, down negligibly from 5.8% last year. Strength in the stock market also has lent a sense of well being which aids spending. But over both the short and long term, it's real wage growth which is the greater force behind spending. During the last ten years, the correlation between the growth in real PCE and real wages is 79%. Thus, the prognosis for near-term gains in consumer spending is in doubt. An easing of the pressure from higher energy and food costs would help.

The personal income & consumption figures are available in Haver's USECON and USNA databases.

 Nominal & Real Income (%) Mar Feb Jan Y/Y 2010 2009 2008
Disposable Personal Income 0.6 0.4 0.8 4.6 3.1 0.7 5.1
  Wages & Salaries 0.3 0.4 0.4 4.4 2.1 -4.3 2.1
PCE Chain Price Index 0.4 0.4 0.3 1.8 1.7 0.2 3.3
  Energy 3.7 3.5 2.3 15.3 10.3 -19.2 14.3
  Food 0.8 0.8 0.7 2.9 0.4 1.3 6.0
  Less Food & Energy 0.1 0.2 0.2 0.9 1.3 1.5 2.3
Real Personal Disposable Income 0.1 0.0 0.5 2.7 1.4 0.6 1.7
  Real Wages & Salaries -0.1 -0.1 0.0 2.5 0.4 -4.5 -1.1
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