American Workers Earn More, Spend More

Personal incomes and spending are on the rise as higher oil prices boost costs and higher employment lifts wages.  A new study by the Bureau of Economic Analysis showed that personal income rose $23.7 billion in total, or 0.2%, in the month of February. At the same time, personal consumption expenditures (PCE) rose 0.1%, or were up $11 billion.

Personal incomes and spending are on the rise as higher oil prices boost costs and higher employment lifts wages.  A new study by the Bureau of Economic Analysis showed that personal income rose $23.7 billion in total, or 0.2%, in the month of February. At the same time, personal consumption expenditures (PCE) rose 0.1%, or were up $11 billion.

Removing the impact of changes in the prices of goods and services, spending rose 0.2%, a sharp reversal of the 0.1% decline in January. The reversal may partly be the result of easy comparables, as weak spending growth has consistently driven PCE lower in late 2015 and in January of this year.

Economists expect PCE to continue to see modest gains throughout the year, both as higher oil prices drive higher prices for goods and thus more spending, but also as unemployment continues to fall. Unemployment fell below 7% in all 50 states according to a recent report by the Bureau of Labor Statistics, with national unemployment falling to 4.9% in February.

The decrease in unemployment has precipitated wage gains, which have been largely flat for the last year. The recent increase in incomes may be the beginning of a broader trend of higher wages thanks to more competitiveness in the labor market. Fewer workers are outside of the labor market but demand for labor remains high, workers should theoretically be able to increase their wages through negotiations with employers.

Most states in the U.S. are seeing declining unemployment rates, with only Wyoming seeing an increase in unemployment in February.

This theory has not borne fruit in recent history. Unemployment rates have fallen steadily for the last 7 years since the Global Financial Crisis, and reached below the level that the Federal Reserve considers full employment. However, incomes have remained largely flat on a broader trendline. One study by the Economic Policy Institute saw that wages have lagged productivity growth by nearly 50%, and wage growth in 2015 remained weak.

Some economists believe this is a temporary aberration in the trend, which is likely to reverse course in 2015. February’s sharp reacceleration in wage growth would theoretically be the beginning of that new trend.

Although higher wages may be forthcoming, economists expect consumer purchasing power to remain relatively flat. This is because inflation rates are likely to rise and, most crucially, the Federal Reserve may step up its efforts to increase borrowing costs by raising its Federal Funds Rate target, as it did in December 2015. The Fed has already stated that it will raise its rate target twice in 2016, but the recent data may encourage them to raise more than that, especially if PCE continues to show strong improvements.