The Stagnant Wage - Modest Economic Growth Conundrum

A recent study, "Wage Woes" by Russ Koesterich at BlackRock examines what is missing in the post-Great Recession recovery and how this missing factor is going to impact growth rates in the economy.

Let's open with a look at two key aspects of the economy; real disposable personal income and real personal consumption expenditures.  Here is a graph showing how real (after inflation) per capita disposable personal income has changed since the Great Depression:

Notice how the curve flattens after 2007 - 2008?  Let's look at that in a bit more detail.

Here is a graph showing the year-over-year annual percentage change in real per capita disposable personal income:

Over the 85 year period, real personal disposable income grew at an average annual rate of 2.06 percent even when all recessions are included.  This growth rate dropped substantially after 1998 as shown by the red arrow; between 2008 and 2013, growth dropped to an average of 0.4 percent per year over the six year period, hitting a peak of 1.6 percent in 2011 and a low of -1.3 percent in 2008.  Even in 2013, four years after the "recovery", real per capita disposable personal income did not grow at all.

Here is a graph showing real personal consumption expenditures:

After a spending slowdown during the Great Recession, America's consumers are now spending with total real personal consumption expenditures of $10.831 trillion in the fourth quarter of 2013.  

Here is a graph showing the year-over-year growth rate of real personal consumption expenditures:

Note how the red arrow on this graph tracks the red arrow on the second graph?  The Great Recession saw the greatest contraction in personal consumption expenditures all the way back to the 1940s and since the end of the recession in mid-2009, annual growth in personal expenditures has risen at an average of 2.2 percent compared to the annual average of 3.3 percent back to the late 1940s when all recessions are included.  The graph also shows us that the latest "recovery" has been the most modest when comparing the growth rate of real consumer spending between recessions back to 1948. 

Now, let's go to the study.  The author notes that real median family incomes have been on the decline since long-before the Great Recession; in fact, the vast majority of American households have had stagnant real incomes since around the year 1998 as shown on this graph:

Obviously, when real household income drops, real disposable income drops.  Between 1973 and 2011, a median male working full-time experienced a 5 percent contraction in inflation-corrected income, dropping from $50,000 to $48,200.  This means that after adjusting for inflation, an average American male worker has not had a raise in the past 4 decades.

What will change this situation?  The author notes that the number of jobless claims is directly related to growth in real income.  Historically, when initial jobless claims around around 320,000, real income growth of between 3 percent and 3.5 percent is likely.  However, even though the economy is in that level now, there are other factors at play.  One key factor, thanks to Washington, is the continuing high level of political and policy uncertainty as measured by the Economic Policy Uncertainty Index (EPUI) as shown on this graph:

Higher levels of political and policy uncertainty leads to lower consumer and business confidence which leads to lower capital spending and lower levels of hiring.  The lack of hiring results in much lower upward pressure on wages.  The author estimates that the current high level of political and policy uncertainty alone has subtracted half a percent from annual real wage growth.  Thanks for nothing Washington!

In closing, here is a graph that shows how much of an impact consumer uncertainty has had on the percentage of consumer spending in GDP:

Between 1970 and 2010, the personal consumption component of GDP grew from 60 percent to 68 percent.  Since 2010, there has basically been no change; the very modest growth level in consumer spending simply is not contributing more to GDP which results in lower GDP growth which leads to more uncertainty which leads to less capital spending by businesses which leads to less hiring etcetera ad infinitum.

America's economy is caught in a loop from which there appears to be no easy means of extrication.  The Fed's pumping and dumping has done relatively little to prod either consumers or businesses to spend, invest and hire, resulting in a situation where there is absolutely no motive for businesses to speed up the pace of wage growth.  Without real wage growth, consumers will not spend, businesses will not invest and the economy will not grow.  It's as simple as that.

Consumers and the Health of the American Economy

As shown on this graph, consumer spending is a key part of the economy in the United States today, making up just under 69 percent of GDP:

According to the University of Michigan Consumer Sentiment index, consumers are a happier bunch than they were during the depths of the Great Recession as shown here:

Unfortunately, as you can quickly deduce, consumer sentiment is still well below levels seen during the recoveries after the 1980 - 1981, 1991 and 2001 recessions.

Here's a graph that shows the growth in real consumer spending since the beginning of the Great Recession in December 2007:

Note that real consumer spending fell to $9.843 trillion in 2009 but has risen by 9 percent to its current level of $10.728 trillion, a new high.

What doesn't look as healthy is the growth rate of consumer spending.  Here is a graph that shows the compounded annual growth rate in consumer spending all the way back to 1929:

Including all recessions (and the Great Depression as well), over the 95 years in the data base, consumer spending rose by an compounded average rate of 2.81 percent.  Please keep in mind that this includes the four years between 1930 and 1933 when consumer spending shrank by between 2.2 percent and 9.0 percent annually.

Here is a detailed look at the annual growth rate of consumer spending since 2007:

2007 - 2.2 percent

2008 - minus 0.4 percent

2009 - minus 1.6 percent

2010 - 2.0 percent

2011 - 2.5 percent

2012 - 2.2 percent

2013 - 2.0 percent

Last year's growth rate of 2.0 percent was the lowest level of growth in consumer spending since 1982, excluding the recession in 1991 when consumer spending still rose by 0.2 percent in spite of the economic contraction.  From the graph, you can easily note that, when measured using the annual growth rate of real consumer spending, this is one of the most modest recoveries in the past century.

Just in case you thought that consumers were being more prudent and taking on less debt, here is a graphic showing the fourth quarter 2013 household debt figures from the Federal Reserve Bank of New York:

Non-housing debt in the fourth quarter of 2013 rose by 3.3 percent from the previous quarter with gains of $18 billion in auto loans and $11 billion in credit card debt.  On a year-over-year basis, auto loan debt rose by $80 billion to $863 billion and credit card debt rose by $4 billion to $683 billion.  It certainly appears that consumers are not particularly adverse to taking on additional debt and that the spectre of debt isn't keeping at least some consumers from spending.

While the headlines suggest that the American economy is on the mend, with so much of economic growth relying on consumers, the rather modest growth in consumer spending compared to historical inter-recessional periods would suggest that economic growth will continue to be less than stellar and may go a long way to explaining why this recovery hasn't really seemed like the recoveries that we all remember so fondly.