Figure 10-9: Growth in employment and borrowing “leverages up” real hourly earnings
The differential between the real earnings growth of individual consumers (green line) and aggregate real consumer spending (black line) is comprised mainly of (1) growth in employment (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 each economic and consumer-spending downturn, year-over-year growth in both employment and borrowing typically returns to “zero.” This results in aggregate consumer-spending growth falling to the underlying rate of growth in individual consumers’ real wages (see circles).
Current Comment: The gap between underlying real hourly wage gains of individual consumers and aggregate real consumer spending—attributable primarily to growth in employment and borrowing—was characteristically large during the 2003-2006 recovery. This gap has closed to some extent in recent quarters, meaning that current moderate growth in consumer spending is, in fact, supported by underlying real-wage and employment growth. This recent development is unusual in that it has occurred as a rsult in improvement in the two consumer-spending drivers rather than by a collapse in consumer spending itself. The unusual role of borrowing in the solid recent trend is still a risk factor, but the current trend of moderate growth in consumer demand appears to be on a solid foundation.
