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 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.
During 2010, consumer spending growth returned to its more normal pattern of exceeding individuals’ real-earnings growth, employment began to record small Y/Y gains (see Figure 11-3) and consumers returned to modest net borrowing. However, Y/Y employment gains seem unlikely to rise more robustly than is currently the case. With real-wage growth now declining, we thus face the prospect of consumer growth slowing from only 1%-2% currently back toward the “zero” level.
