Consistent job losses began in 2001; They only ended after a massive stimulus package of tax cuts, deficit spending, interest rate cuts, combined with increases in the money supply and a currency devaluation began working their way through the system.
Despite the lack of job creation, real consumer spending continues to drive the economy. The lack of wage growth calls the ability of consumers to keep spending into question:
“Wages currently account for only 55% of personal income, nearly the lowest on record. Wage growth has been a drag on overall income growth for an unprecedented period (see chart). Nominal wage income fell on a yearly basis in 2002 for the first time in the history of the series back to 1960 and growth in wages continues to account for only about 40% of income growth, despite recent acceleration.
Spending was sustained during this period largely due to other supports to household cash flow. Primarily these came in the form of extraction of rapidly growing home equity and tax cuts. However, as noted many times, those supports to spending are nearing an end. Consumers will get one more lift from last year’s tax cuts in the form of higher than normal refunds, although refunds through mid-February were falling short of initial expectations. Home equity extraction through refinancing has already dropped significantly, but will fall further later in the year when mortgage rates resume their ascent.”
I am actually less negative on the consumer than “The Dismal Scientist” — but that’s not necessarily beciase I am positive on Wage Growth; It simply means I have less confidence in the public’s ability to moderate their spending habits (i.e., reducing “sport shopping”) to a level commensurate with their real income growth and debt levels . . .
The Dismal Scientist
March 8, 2004