Higher gas and foot prices are not the real ‘headwinds’ that threaten to stall this economic recovery. They are really a symptom of cash-strapped consumers inability to buy more than necessities two years after the end of this Great Recession.
The latest signs of consumer health show that consumers are not buying enough to kick growth higher because they still have so much debt to pay down. And they won’t be able to make much of a dent in debt, unless their incomes rise faster.
The best income measure is the Personal Income and Expenditures report of the Commerce Dept. Personal income in April did post a 0.4 percent gain equaling the pace in March. Importantly, the key wages & salaries component increased 0.4 percent, following a boost of 0.3 percent in March. (Wages and salaries make up some 80 percent of personal income; self-employed incomes and transfer payments the rest.) However, real disposable income (after taxes and inflation) in April was flat, matching the March pace but actually topping February’s 0.1 percent decline. Consumers have had no recent improvement in real spending power, in other words.
The situation is not being helped by the push in several states to eliminate collective bargaining of public employees. Collective bargaining means union bargaining and it is the only countervailing force to Big Business lobbying for more tax breaks—which is the corporations’ method of collective bargaining—when corporations have record profits. Corporations have always been able to bargain with their dollars, in other words, whereas most employees have no bargaining power unless they belong to unions.
The mild inflation we have at present is actually a good thing. It means demand is increasing and not stagnant, even with personal incomes barely keeping up with the inflation. In fact with gas prices taken out, the Consumer Price Index is up just 1.5 percent in a year.
Consumers are shopping, having increased their credit card debt for only the second time in a year (December’s holiday shopping was the last increase.). Overall consumer credit increased at an annual rate of 2-1/2 percent in May 2011, according to the Federal Reserve. Revolving credit increased the most at an annual rate of 5 percent, and non-revolving credit increased at an annual rate of 1-1/4 percent. Non-revolving credit (installment loans) fell because of the shortages of vehicles dependent on parts from Japan.
Consequently there is little pressure on employers to raise wages with so many still out of work. Since the start of the U.S. recession in December 2007, though, household debt leverage has declined. It is still 115 percent of disposable household income, down from 130 percent in 2009. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. And future growth is itself dependent on policies that increase personal incomes and wages & salaries.
Harlan Green © 2011