Figure 10-7: Real hourly earnings: Best leading indicator of real consumer spending (PCE) downturns
Real hourly earnings downtrends of a year or longer have been a generally reliable leading indicator of consumer-spending downtrends. Real hourly earnings gave particularly notable advance warning of the 2000–2002 economic downturn.
Real hourly earnings are reported on a pretax basis. Therefore, in the mid-1980s and 2003-early 2004, strong gains in consumer spending despite slowing real earnings were an anomaly reflecting federal tax cuts in those periods.
Current Comment: Individuals’ year-over-year real average hourly earnings comparisons as of early 2007 have rebounded to over 2% from the actual declines in late 2004 and 2005. And surprisingly, and somewhat unprecedented, the cumulative declines in purchasing power from 200 to 2004 did not affect consumer spending nearly to the degree that would have been expected (particularly once the year-over-year effect of the 2003 tax cut had elapsed). The answer seems clear: consumer borrowing, particularly on homes, has continued at such high levels that the American savings rate has been negligible for over two years now. While the high contribution of borrowing to consumer-spending growth would seem to be unsustainable, the underlying strength in real hourly earnings should provide some buffering effect against any sharp slowdown in consumer-spending growth.
