Jobs Up and Unemployment Down: Why Aren't Consumers Spending?
2/10/2012
Q: With jobs up and unemployment down, why aren’t consumers spending? Isn’t there a statistical connection between them?
There is most certainly a connection between labor market conditions and consumer spending. But since earnings are only one component of household incomes, the relationship is relatively loose and varies depending on the way in which comparisons are cast.
Let’s start with a few data points: employment and unemployment have both improved, but have not returned to pre-recession levels. Nevertheless, after-tax incomes exceed the pre-recession peak and the broadest measure of consumer spending—personal consumption expenditures—is at a record high even afteradjusting for inflation.
So, on those data, there appears to be a connection: more jobs, fewer jobless, increased incomes, and higher consumer spending.
But when we look at the composition of the income increases, the “connection” is not as apparent.
In December, after-tax incomes were, on net, some $950 billion higher than immediately prior to the recession. Of that, only $530 billion was available for consumer spending, since rents and benefits are not distributed as cash.
And of the $530 billion net increase, worker earnings (i.e., wage and salary disbursements) represented less than one-third (29.4%).
For working households, which comprise the vast majority of consumers, the paycheck is the primary source of income. Their earnings are a tad (2.4%) higher than in December 2007. But when adjusted for inflation, paychecks are actually below pre-recession levels.
Put differently: paycheck purchasing power is 5% less today than four years ago. And with necessities (viz., gasoline and food) costing more, households have cut discretionary spending.
The decline in real paychecks owes to the combination of: fewer jobs (-4.0% from pre-recession), elevated underemployment (i.e., involuntary part-time workers), and the drop in the employment rate.
In sum: there is some connection between jobs and consumer spending. But it is anything but direct. While the jobs gains of the past 16 months contributed to higher consumer spending, several other factors were more consequential,
including: elevated income transfers, lower taxes, reduced debt service, and less saving.
Patrick J. O’Keefe is director of economic research at J.H. Cohn.
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