Figure 10-7: Real hourly earnings: Best leading indicator of real consumer spending (PCE)
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: Real-hourly-wage comparisons in late 2008 began to increase sharply, reflecting price deflation reulting from the 2008 downturn. This was, yet again– in the face of near-universal pessimism–a clear signal that the increasing purchasing power of the 90%-plus employed (rising unemployment notwithstanding) would result in a modest upturn in consumer spending in late 2009 and early 2010. The continued strength of this indicator suggests that Y/Y growth in real consumer spending in 2010 could well exceed current expectations.
