Economic First Look: Stagnant Wages Will Curb Spending

 | Dec 17, 2011 | 8:30 AM EST
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  • Housing Market Index, 10:00 a.m. (all times EST)
  • Jeffrey Lacker, President of the Richmond Fed (non-voter), speaks, 1:15 p.m.


  • Housing Starts, 8:30 a.m.


  • Existing Home Sales, 10:00 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.


  • GDP (including corporate profits), 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Chicago Fed National Activity Index, 8:30 a.m.
  • Consumer Sentiment (University of Michigan measure), 9:55 a.m.
  • FHFA House Price Index, 10:00 a.m.
  • Leading Indicators, 10:00 a.m.


  • Durable Goods Orders, 8:30 a.m.
  • Personal Income and Outlays, 8:30 a.m.
  • New Home Sales, 10:00 a.m.
  • Bond markets close early, 2:00 p.m.

Friday is where the action is this week. Three top-tier indicators are scheduled for release, including reads on manufacturing, personal incomes and spending and new home sales. Other housing data due out this week include the NAHB Housing Market Index on Monday, Housing Starts on Tuesday and Existing Home Sales on Wednesday.

But I am most interested in the Personal Income and Outlays report. There was so much publicity about how holiday traffic was up sharply during the Black Friday weekend from a year ago -- and then we got the disappointing Retail Sales report. The discrepancy between the two most likely is in the area of sales prices, and whether or not shoppers actually bought anything or were just spectators. I reported in Will Retail Have a Happy Holiday Season? that a record 226 million people were in stores over the Black Friday weekend. But that's traffic, not dollars. The Retail Sales report showed that November sales increased by 0.2% (on a seasonally adjusted basis), both with and without automobiles, and by 0.3% for the general merchandise category. A decent uptick but not awe-inspiring as expectations were for percentage gains that were about double those numbers.

What gives? Well, one likely reason is that the Retail Sales report is not adjusted for inflation. It cannot adjust for 2-for-1 sales and the like. It's simply dollars in at the register. And it doesn't tell us whether customers decided to wait until Nov. 26 to buy a sweater instead of Nov. 12, thronging the stores during what might have been promotional events, but not substantially boosting sales for the entire month. Promotions may lure people in, but that doesn't mean that sales in dollars will move in tandem -- especially those measured over the entire holiday shopping season.

On Friday, we will get a comprehensive look at spending, including for goods as well as for services, for the month of November, and these data will include some adjustment for prices. Still, the metric for prices contained in the Personal Income and Outlays report relies on the same measures for prices done by surveys for the Bureau of Labor Statistics (BLS), which might not capture the full extent of promotional events. (Note that the underlying data for the prices for individual products is the same in this report as it is for the consumer price index (CPI) data, but the aggregate price measure is weighted differently in Friday's report.)

In addition to shopping habits, I also want to look at incomes, particularly wages and salaries. In the most recent employment report, the average hourly pay for all private-sector employees decreased by $0.02, or -0.1%, with the average weekly paycheck falling by $0.76. During November, the headline CPI number was unchanged. The inflation metric in the Personal Income and Outlays report uses a different weighting scheme for the component product and service prices, but generally speaking, real wages are likely to be stagnant or perhaps fall a bit.

This does not portend well for future spending. This metric of income growth can be forward looking when it comes to assessing future spending patterns. Consumer credit is growing a bit, but it is unlikely to provide ample fodder for them to spend more. According to the Personal Income and Outlays report, the savings rate has fallen quite a bit recently, allowing consumers to boost spending in the process, and that trend can persist only so long.

That said, for a different take on consumers' saving patterns, take a look at my column, Exploring the Psychology of Savings. As I discuss, using different data from the Federal Reserve's Flow of Funds (FoF) report, savings -- and incomes -- may actually be higher than the Bureau of Economic Analysis's data might suggest in Friday's data. Importantly, though, the drop in households' aggregate net worth, as I discussed in the Psychology of Savings column, may cause consumers to be more constrained in shopping, even if their savings rate might actually be higher in that report versus what other reports might show.

We'll find out more on Friday if the gaps in the savings rates between the two sets of data show any signs of narrowing. But unlike the FoF report, Friday's data offer the most comprehensive look at consumer incomes and spending that the government produces, and goes well beyond retail sales.

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