Figure 10-9: Growth in employment and borrowing “leverages up” real hourly earnings
The differential between the Y/Y growth in real hourly earnings of individual consumers (green line) and aggregate real consumer spending (black line) is comprised mainly of (1) growth in employment (i.e. number of consumers receiving income) and (2) additional funds generated for spending by consumer borrowing*. This differential swells during the early and middle stages of a typical consumer-spending cycle. However, in the late stages of economic and consumer-spending slowdowns, Y/Y growth in both employment and borrowing both typically fall back to “zero.” This results in aggregate consumer-spending growth falling to the underlying rate of growth in individual consumers’ real wages (see circles). The retrenchment in borrowing is particularly important in setting the stage for the next upturn in consumer spending.
Current Comment: The 2008-2009 downturn in borrowing and employment has been so significant that the Y/Y rate of growth in consumer spending (black line) in 2009 has been far below the underlying rate of real hourly wage growth of the 90%+ employed (green line). This is a highly unusual phenomenon. Even with Y/Y real hourly wage growth slowing in 2010, if net borrowing returns to “zero” (from its current net repayments) and employment growth rebounds to zero (see Figure 11-3), these two lines could well meet at, say, +2%. Y/Y growth in real consumer spending (black line) could thus exceed economists’ current forecasts.
