Figure 10-7: Real hourly earnings: Best leading indicator of real consumer spending (PCE)
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 recent downtrend in Y/Y real-hourly-earnings comparisons does not bode well for the consumer spending outlook. This, in turn, is a warning sign that we may be facing a renewed slowdown in the economy in general and in corporate profits, with commensurate difficulties for the stock market.
