Figure 11-11: Combined year-over-year increases in employment and real earnings growth approximate growth in real consumer spending (PCE)
Adding the year-over-year rate of increase in real average hourly earnings (wages per worker) to the year-over-year rate of increase in employment (number of workers) approximates the combined effect that these two “engines of consumer demand” have on consumer spending. The sum of these series (green line on chart) closely matches the uptrends and downtrends in consumer spending (black line). This suggests that these two economic inputs—real hourly earnings (leading) and employment rate (lagging)—combine to account for a preponderance of the advances and declines in the consumer-spending cycle. Because real average hourly earnings is a pretax series, however, tax cuts can create anomalies (see 1982 and 1986, and 2003-early 2004).
Current Comment: The unusually large differential from mid 2003 through 2005 between (1) combined increases in real hourly earnings and employment growth and (2) real consumer spending was attributable to continued strong rates of increase in consumer borrowing and positive wealth effects emanating from continuing increases in home values. As this chart shows, however. this differential is rarely sustained over long periods of time, and as of late 2006 and early 2007 has largely disappeared. This indicates that consumer-spending growth over the coming year will largely reflect real-wage growth and employment alone.
