Let’s start with some good news.
Consumer spending rose in June. The Associated Press reports,
Consumer spending rose by a solid 0.4 percent in June, while a key gauge of inflation increased at an annual pace of 2.2 percent for a second straight month — the strongest back-to-back gains in six years.
The gain in spending followed an even better 0.5 percent rise in May, which was revised from a 0.2 percent initial estimate, the Commerce Department reported Tuesday. Incomes rose a solid 0.4 percent in June, matching the May increase.
That all bodes well for sustained economic opportunity (always acknowledging trade concerns).
The AP continues,
The economy grew at a 4.1 percent annual rate in the April-June quarter, the fastest pace in nearly four years, and nearly double the 2.2 percent gain seen in the first quarter. Much of the boost came from a rebound in consumer spending as consumers began to spend the extra income they received from the $1.5 trillion tax cut Trump pushed through Congress in December.
Consumer spending, which accounts for 70 percent of economic activity, grew at an annual rate of 4 percent in the April-June quarter after a lackluster gain of just 0.5 percent in the first quarter.
Another good thing: Consumer confidence is also up.
The Conference Board, a business research group, said Tuesday that its consumer confidence index rose to 127.4 this month from 127.1 in June.
The index measures both consumers’ assessment of current economic conditions and expectations for the future. Their view of current conditions in July was the rosiest since March 2001; 43.1 percent said jobs were “plentiful,” most since March 2001.
Yet, again, concerns.
But consumer expectations for the next six months dropped for the second straight month to the lowest reading since December.
Also today come reports of still-sluggish wage growth, which may be expected to dampen both confidence and spending over time.
U.S. workers saw their wages and benefits grow more slowly in the second quarter, a sign that a tight labor market has yet to accelerate income gains.
The Labor Department says overall compensation rose 0.6 percent in the April-June period, compared with a 0.8 percent rise in the first quarter.
Slow growth in wages has tended to take the luster of what has otherwise been a robust upward trend in economic performance. At Vox, Jason Furman takes on the issue. Forman was chair of the White House Council of Economic Advisers from 2013-2017. It’s a lengthy think-piece and one worth reading in its entirety. Some excerpts:
Wages are growing much more slowly than the last time we had sustained low unemployment rates, the late 1990s. This is the notorious “wage puzzle” …
My interpretation of the wage puzzle…: This is simply what a high-pressure economy looks like when productivity growth rates and inflation are both relatively low. Some of the other explanations — including inequality, an especially popular answer these days — appear to point in the wrong direction. For instance, despite what you may have heard, economists broadly accept that in the past few years, wage growth has actually been stronger at the bottom than at the top.
Productivity lags, he writes, explain much:
Lower productivity provides much of the answer. The standard economic theory is that wages are determined by productivity. When workers in one country can build, say, cars better and more quickly than workers in another country, their average wages will be higher. This helps explain why average wages are higher in the United States than in India. Like most standard economic theories, this one is missing a lot, but it is the best place to start in understanding wages.…Productivity growth has slowed dramatically in recent years in the United States and almost all other advanced economies as well. Productivity growth was spectacular in the late 1990s, rising at 3 percent annually. It has been dismal in recent years, rising at only a 0.7 percent annual rate. That’s part of the explanation for slow wage growth: Based on the productivity numbers alone, one would predict that average wages would be growing about 2.3 percent more slowly than they did in the late 1990s.
Jason Furman makes a convincing case that the explanation doesn’t lie with rising inequality or corporate profits. The key factor is productivity.