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Forecasting the direction of consumer spending growth: real hourly wages (3)
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Figure 10-9: Growth in employment and borrowing “leverages up” real hourly earnings
Figure 10-9
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 downturn in borrowing and employment was so significant in 2008-2009 that the Y/Y rate of growth in consumer spending (black line) in 2009 fell far below the underlying rate of real hourly wage growth of the 90%+ employed (green line). This was a highly unusual phenomenon.

Since 2010, consumer spending growth has returned to its more normal pattern of exceeding individuals’ real-earnings growth, as employment began to record small Y/Y gains (see Figure 11-3) and consumers returned to modest net borrowing. Given today’s relatively weak (zero) real-wage growth, further stable growth in consumer spending at this mid-to-late stage of the economic recovery will require continued growth in employment and borrowing.
Sources: Real personal consumption expenditures: Bureau of Economic Analysis Average hourly earnings: Bureau of Labor Statistics
*Plus the effects of lower tax rates or minus tax increases
Updated: 10/3/15