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 (lagging)–combine to account for a preponderance of the advances and declines in the consumer-spending cycle. Net borrowing or saving by consumers accounts for most of the difference between these two lines. 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 close relationship between these two lines continued as the downturn deepened in 2008. In the last months of 2008 and the first half of 2009, however, there was a rare reversal in the relationship between these two lines, as a sharp reduction in borrowing and repayments of debt forced consumer spending growth lower than the combined effects of individuals’ real wage growth and employment growth. The relationship appears to be coming back into sync and, if real-wage growth remaiins positive and employment growth returns even to slight Y/Y gains, Y/Y real consumer-spending growth may well be positive throughout 2010.
