Stagnant Incomes Signal Restraint In Consumer Spending

(Bloomberg News) Wages are stagnating as the job market cools, restraining the consumer spending that is needed to sustain the U.S. economic recovery.

Average hourly earnings were little changed in August from the prior month and up 1.7 percent from a year earlier, matching the smallest gain since records began in 2007, the Labor Department reported last week. Payroll growth slowed to 96,000 last month, while the unemployment rate fell as more people left the labor force.

Limited employment and wage prospects together with the highest gasoline prices in four months are straining household budgets after the weakest quarter for spending in a year. With little else to spur the expansion, Federal Reserve policy makers meeting this week are set to consider further easing to shore up the world's largest economy.

"Real wages are going nowhere -- something between nowhere and down -- depending on what occupation you are in," Alan Blinder, a Princeton University economist and former Fed vice chairman, said in a Sept. 7 interview on Bloomberg Radio's "Surveillance" with Tom Keene. "With a weak labor market -- and we have had a very weak labor market for four years -- there is not a lot of prospect for a turnaround in that."

A cooling global economy and the so-called fiscal cliff of U.S. tax increases and government spending cuts that take effect at the end of 2012 unless Congress acts represent hurdles for companies considering whether to take on more staff.

The economic outlook is "about as uncertain as we have seen it in a while," Michael DeWalt, director of investor relations at Caterpillar Inc., said last week at an industrials and materials conference in Boston.

The average workweek for employees, which means extra pay when it lengthens, held at 34.4 hours in August after being revised down in July, last week's report showed.

The Bloomberg Consumer Comfort Index hovered near an eight- month low in the week ended Sept. 2.

"All of the income measures are not very pleasant," said Chris Christopher, director of U.S. and global consumer economics research at IHS Global Insight in Lexington, Massachusetts. "Wage gains have been slow and flat. There is going to be a lot of discontent in the consumer-sentiment numbers."

Dissatisfied Americans watching their wallets include Cheryl Zackery of Columbus, Georgia, who has been out of work since April 2011 and is "not pleased with the economy."

"I am not spending," said Zackery, 54, who has worked in retailing and customer-service in the past and hasn't found a job even after filling out 280 applications. "They are not hiring. I am discouraged."

Costlier gasoline and groceries will take a bigger slice of American workers' paychecks.

"It leaves the consumer in a vulnerable position without much income when energy prices are rising," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and former economist for the Fed. "Without income growth, it's hard to have spending growth. It's going to be tough for demand to pick up. The economy is going to continue to struggle."

A gallon of regular fuel at the pump was $3.82 on Sept. 6, close to the highest since April, according to AAA, the biggest U.S. auto group. While driving to supermarkets is becoming more expensive, grocery prices may soon follow as the worst U.S. drought since the 1950s ravages crops.

The lack of progress on jobs and persistent unemployment is a "grave concern," Fed Chairman Ben S. Bernanke said Aug. 31 in a speech in Jackson Hole, Wyoming, as he made the case for additional monetary policy action.

Fed policy makers, who conclude a two-day meeting on Sept. 13, have discussed extending the period over which they'll keep their target interest rate low and purchasing more assets to hold down borrowing costs.

Unemployment, which fell to 8.1 percent in August as 368,000 Americans dropped out of the labor force, has exceeded 8 percent since February 2009, the longest stretch in monthly records going back to 1948. At the same time, households are rebuilding savings and paring debt.

"Income growth has been a key headwind for consumers through the recovery," said Nathan Sheets, global head of international economics at Citigroup Inc. in New York. "I expect a roughly constant saving rate over the next several years as consumers continue to de-lever, so the pace of income growth will essentially determine the pace of consumption growth.

"This is an important tension," said Sheets, who was director of the Fed's international finance division until last year. "We need more income to get more consumption and we need more consumption to get more income -- that is, stronger consumer demand for firms to be willing to hire and pay more."

Consumer purchases, which account for about 70 percent of the economy, climbed at a 1.7 percent annual rate from April through June, following a 2.4 percent gain in the first three months of the year. The economy also expanded at a 1.7 percent annual pace in the second quarter.

Lowe's Cos., the second-largest U.S. home-improvement retailer, in August reduced its full-year profit forecast and said it expects sales to be little changed, down from a prior projection of a 1 percent to 2 percent increase. Mooresville, North Carolina-based Lowe's has itself cut more than 500 corporate jobs this year after closing 27 U.S. stores.

Retailers face "a lot of macro concerns," Chief Executive Officer Robert Niblock said at a conference in New York on Sept. 5, citing unemployment and the uncertainty caused by presidential elections in November. "Underlying demand will remain soft in the near term."