It is often said that you have to earn your keep to make it in this world. Fortunately, there is an all-time, seasonally-adjusted high of 146,063,000 employees on nonfarm payrolls earning their keep. The unfortunate part is that their average hourly earnings aren't accelerating in a way that would encourage stronger levels of consumer spending.
The tepid growth in average hourly earnings is a problem for the economy considering that consumer spending accounts for 69% of real GDP. The tepid growth is a peculiar circumstance, too, considering the unemployment rate of 4.4% in April was the lowest it has been since May 2007.
Piecing Things Together
The pieces are all there -- or so it seems -- for the consumer to let loose.
- The U3 unemployment rate is near a 10-year low
- Weekly initial jobless claims are close to their lowest levels over the last 45 years
- The Conference Board's Consumer Confidence Index is basically at its highest level since 2000
- The major equity indices are at, or near, record highs
- Borrowing rates are low
Other factors could be added to the list above, yet they wouldn't change the argument. Despite the favorable disposition of many presumed catalysts for spending, consumers are continuing to hold their firepower.
Consumers have fired some shots here and there, but in the first quarter of 2017, they were almost firing blanks as personal consumption expenditures increased from the fourth quarter at a seasonally adjusted annual rate of just 0.3%.
Compared to the first quarter a year ago, personal consumption expenditures were up 2.8%. That isn't terrible. Actually, it was close to the average for the last 20 years, yet in light of all of the reported drivers out there, spending activity that is just average is just disappointing.
Breaking Things Down
Since the end of the Great Recession in June 2009, it has been difficult to sustain better-than-average consumer spending activity.
That's remarkable considering how low interest rates have remained and how many positions have been added to nonfarm payrolls, yet it becomes more understandable considering how restrained both average hourly earnings growth and real disposable personal income growth have been over the same period.
One of theories behind the tepid growth in average hourly earnings and real disposable personal income growth is that it reflects the fact that many of the new jobs added have been lower-paying jobs.
There is some truth in that assertion as payrolls for the retail trade and leisure and hospitality industries, for instance, have swelled by 4,471,000 combined since their lows in late-2009/early-2010, accounting for 27% of the increase in total nonfarm payrolls since December 2009.
Then and Now
The April Employment Situation Report, which was released on Friday, showed retail trade payrolls increasing by 6,300 positions and leisure and hospitality payrolls increasing by 55,000 on a seasonally adjusted basis.
The report also showed average hourly earnings up 2.5% year-over-year versus 2.6% for the 12-month period ending in March.
An informative point about the relatively subdued growth in average hourly earnings jumps out in the fact that, when the unemployment rate was 4.4% in May 2007, average hourly earnings were up 3.5% year-over-year.
The CPI inflation rate was higher in May 2007 than it is today, but not that much higher at 2.7% versus 2.4% for the 12-month period ending March 2017.
After adjusting for inflation, then, average hourly earnings in April were basically flat year-over-year.
What It All Means
Tight labor markets go hand-in-hand with rising wage growth as competition for labor intensifies. The wage growth thus far has been tepid, which might suggest the labor market isn't as tight as the U3 unemployment rate suggests it is.
The U6 unemployment rate, which accounts for total unemployed workers plus all persons marginally attached to the labor force plus the total employed part-time for economic reasons, was 8.6% in April. That is the lowest U6 rate since November 2007.
The decline in the unemployment rate is a very welcome development, but clearly, the wage growth economists are all looking for on the other side of it remains elusive.
Granted the theoretical argument for why average hourly earnings growth should be accelerating is relatively strong, but the empirical data that should be showing it continue to be relatively weak.
Why there hasn't been a more meaningful acceleration in average hourly earnings growth is a perplexing question, yet it does provide an answer for why the U.S. economy isn't earning a stronger keep.