Here's One Reason Why The Economy Is Looming Large
Based on inflation data released this morning, a combination of slower wage growth and faster price growth has led to falling real hourly and weekly earnings for most workers.
The Figure shows the yearly change in real earnings for the approximately 80% of the workforce that are non-managers in services or blue-collar factory workers. After handily beating inflation last year, wage growth began to slow as the economy lost speed in the last quarter of 2007. A year ago, annual hourly wage growth before inflation was 4.3%; this year—Jan07-Jan08—it was 3.7%.
Inflation, conversely, driven up by higher energy prices, is growing about twice as fast as was the case one year ago.
This combination has led to the dramatic shift in the buying power of workers’ paychecks. A year ago, real hourly and weekly earnings grew on a yearly basis by over 2%; this January, they are both down by about 1%. Note also that over the past two months, due to the decline in average weekly hours—a function of the weakening job market—real weekly earnings are falling more quickly than hourly earnings.
These trends have two important implications. First, falling real wages will likely lead to diminished consumption, reinforcing slower macroeconomic growth. Second, the reality of squeezed paychecks for most workers helps to explain the primacy of economic concerns among voters in the presidential primaries.
And everybody whether they are at the top or at the bottom will pay attention when consumer's who have been squeezed over the past yaer continue getting squeezed and start consuming less. Personally I think a less consumption oriented society is a good thing but it has to be replaced by something whether it is the service industry or the manufacturing industry. Whatever the case may be don't you think there is going to be a lot of cleansing of the system and the industry in general because of its downturn in performance? Maybe a new Sarbanes Oxley for the credit market?
February 20, 2008 12:01 PM | Reply | Permalink
Sure, a recession will whack some bad actors--unscrupulous lenders, greedy investors who bought into the bubble, eg--from the stage and that's a good thing--good old market discipline.
But it will also whack a whole lot more innocent victims who were minding their own business while market regulators were asleep at the switch. Greenspans Fed is a good eg...they watched the housing bubble inflated, even encouraged the 'innovative' borrowing schemes, amidst warnings that the subprime market was becoming unhinged.
February 21, 2008 8:47 AM | Reply | Permalink
Wow. I was incredibly blessed to earn a 3% raise this year. I barely stood still and I feel damn lucky to have gotten that.
Also, it looks like my CDs are getting shorted. Time to switch banks again.
February 20, 2008 12:26 PM | Reply | Permalink
CDs "getting shorted"? That could be depressing. Don't think of it that way!
Think of it as your patriotic contribution to the War to Save the Wall Street Banks.
February 20, 2008 1:06 PM | Reply | Permalink
. . . falling real wages will likely lead to diminished consumption . . . .
Isn't it more accurate to say that "falling real wages will likely lead to diminished [real] consumption" -- "real" consumption being the use value of the service or product consumed?
And since "consumption" is typically reported in nominal terms (that is, in terms of price and not in terms of value), why would a fall in "real" wages be a factor in its calculation?
February 20, 2008 1:21 PM | Reply | Permalink
Yes, it's real wages and real consumption. And in the GDP reports that come out every quarter, they report real--inflation adjusted--consumption.
It's the biggest share of GDP, about 70%. Many of us economist-types are thinking that with real wages on the wane and many households highly indebted--including those whose net worth is falling with their home values--real consumption will likely grow slowly in coming quarters.
February 20, 2008 9:12 PM | Reply | Permalink
When can we start replacing these charts and graphs with driving directions to the local communist party?
February 20, 2008 3:49 PM | Reply | Permalink
I accidentally came up with the stat -- while fencing with a seeming troll over on Ezra's -- that 36% of American families may living below a more accurately drawn poverty line! Would that a bummer?
50 percentile (technically, mean third-quintile) family income for 2005 was $56,277.
A plausible poverty line for a family of three (on the "minimum needs" table on p.44 of the 2001 book Raise the Floor) is $31,111 in 2005 dollars -- if health care is otherwise covered. Add $10,000 for a 2008 family health policy and we get a plausible poverty line (as opposed to the implausible federal line computed at 3X the price of a super cheap diet) for a family of three of $41,111.
(Raise' supplies extensive explanations for its minimum needs numbers in Appendix B -- its budget tables cite Solutions for Progress.)
The difference between second and third quintile mean family income ($35,000, $56,000) is about $1,000 per percentile. That computes ($35,000 is 30 percentile + $6,000 more is 6 more percentile) to 36% of American families living below a believable poverty line (at least without food stamps and other helps -- average family size is 3.13 persons).
I had previously been touting 25% as a realistic poverty line -- I just doubled the 12.5% official line -- seemed to make a conservative fit with what at a quick look seemed Raise the Floor's doubling of official criteria (a closer look says it was more than doubling -- $17,000 in 2005 dollars being the official criteria for a family of 3).
Assuming I can't find something wrong with 36% in poverty, I will email this startling stat to media all over the country. Continuing to report 12.5% poverty without qualification is like reporting in Columbus' time that the world is flat -- it makes fewer waves; but informed people know otherwise.
February 20, 2008 8:13 PM | Reply | Permalink
Just to add a little meat to the above:
America is the only nation whose — official federal — poverty rate is set at three times the price of the cheapest possible diet (dried beans only, no canned) — of all arbitrary things (probably was an accidental fit around ‘55 when it was developed and still close enough around ‘65 when adopted).
Europe’s poverty line -- usually measured at 50% of median income -- is somewhat arbitrary too.
50% of median income may not be an accurate way to compare poverty in America and Europe as median income in America is a lower percentage of average income than almost anywhere else — maybe much lower!
From 1973 (the beginning of inequality here — which I grandly call the Great Wage Depression) to 2005 the 50 percentile wage in America grew from $12.99/hr to 14.29/hr — an increase of only 10% while average income grew 70%. [I got the wages from table 3.4, on p. 121 of the book The State of Working America 2006/2007].
Wages don’t perfectly parallel income of course — a lot more members per family went to work over those years — but wages may more precisely be the point as to what has happened to American labor.
Table 8.14 on p. 342 of State' shows European manufacturing workers earning 20% more than American counterparts if you leave out Spain, New Zealand and Portugal (and is an OPTIMISTIC comparison because factories are the place in American private business where unions have hung on best). British book keeping just moved away from comparing factory workers only and came up with the conclusion that Americans families are now poorer than theirs: http://www.the globalist.com/StoryId.aspx?StoryId=6369.
Table 8.17 on p. 350 of State’ actually shows poverty in America higher than in any European state even using the 50% of median measure.
February 20, 2008 8:19 PM | Reply | Permalink
Excuse please:
Here is the proper address for the link above (don't pay attention to you spell checker in the middle of a web address :-])
http://www.theglobalist.com/StoryId.aspx?StoryId=6369
February 20, 2008 8:30 PM | Reply | Permalink
Starting to feel like the 1932 election.
February 20, 2008 9:33 PM | Reply | Permalink
Inflation, conversely, driven up by higher energy prices, is growing about twice as fast as was the case one year ago.
Inflation, driven up by the government printing more money.
Interest rates dropped 0.75 p[ercentage points and are likely to drop again. Ouch.
February 20, 2008 11:22 PM | Reply | Permalink
Speaking of the economy, can anyone tell why the candidates appear to be keeping mum on the free trade issue? ATT&T is set to outsource all of its customer service by 2011. That means, if you are a customer of that company and you have a phone issue, you will no longer be calling anyone in the United States.
Such problems are becoming commonplace and the most disturbing aspect is that most Americans seem not to care. With our nation's manufacturing sector in the toilet thanks to China, we simply cannot afford to continue to let our jobs be outsourced.
In theory, large corporations that send their jobs overseas would compensate by lowering prices on their goods. Unfortunately, that is not happening. So not only are prices rising, but our jobs are dwindling.
Doesn't anyone else see this as the single biggest issue facing our nation? Forget this terrorism nonsense. Anyone with even an ounce of objectivity knows that Al Qaeda doesn't really exist and that there is no Global War On Terror.
February 21, 2008 12:53 AM | Reply | Permalink
Obama addressed this quite specifically in his Houston address on Tuesday. He said exactly what he wanted to do, and that this is a real concern of his that must be addressed. I was happy he talked about it.
February 21, 2008 2:22 PM | Reply | Permalink