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Forecasting the direction of consumer spending growth: real hourly wages (2)
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Figure 10-7: Real hourly earnings: Best leading indicator of real consumer spending (PCE)
Figure 10-7
Year-over-year changes in individuals’ real average hourly wage gains (green line), or the unit purchasing power of the employed, over time have proven to be one of the most useful predictors of the outlook for growth in real consumer spending (black line). Real hourly earnings gave particularly notable advance warning of the 2000–2002 economic downturn.

Real hourly earnings are reported on a pretax basis. In the mid-1980s and 2003–early 2004, Federal tax cuts led to gains in consumer spending despite slowing growth in real earnings, an anomaly.
Current Comment: The prolonged downtrend in Y/Y real-hourly-earnings comparisons in 2010 and 2011 does not bode well for the consumer spending outlook. It is a warning sign of a possible renewed slowdown in the economy in general, with commensurate difficulties for corporate profits and the stock market. Only if Y/Y real-wage growth continues to improve on this year’s modest rebound is it likely that the economy will grow its way out of the current doldrums.
Sources: Real personal consumption expenditures: Bureau of Economic Analysis Average hourly earnings: Bureau of Labor Statistics
Updated: 6/1/14