It’s the wages, stupid: Consumer spending down because Main Street left behind by Wall Street

Spending down
Bloomberg – click for story

There is still something rotten in Denmark. And in our economy.  Yes, the housing market has stabilized and the “headline” unemployment number seems under control.  (We’ll get back to that in a moment.) But signs of a fragile economy are everywhere, if you know where to look. A big one emerged today. Consumer spending took an unexpected tumble last month, the Commerce Department says.  When seasonally adjusted, it was the biggest drop since September 2009.

That doesn’t sound like an economy that’s getting back up to speed.

The problem is simple: People still don’t have money. Back to that unemployment number. Remember, Harvard grads who are slinging burgers count as “employed.”  Meanwhile, people who have been unemployed for a long time don’t count as unemployed.  Great statistics, right? And we worry about the inaccuracy of a pitcher’s won-loss rate as a signal of success. Employees are still overworked, and overtime pay has disappeared as quickly as free nights and weekends have.  College graduates entering the job market have a $1 trillion cloud hanging over them — student debt loads for this graduating class have once again set a record, so good luck getting these 20-somethings to buy a car, let alone a house some day.

And yet, the stock market continues to set records.  How can this be? Simple: Corporations tend to do better at the tail end of a recession than workers.   I’ll use gas as an example.

It’s a truism that belies traditional economics: gas prices rise faster than they fall. We’ve passed Memorial Day now, so you will experience this one first hand. In a true free market, this couldn’t be true. But markets have hidden forces that traditional economics ignores.  For example, as wholesale gas prices rise, stations have immediate incentives to raise prices, and do so in concert (you might even say collusion!). If they don’t, they lose money on every gallon. On the other hand, when wholesalers drop prices, there is no immediate incentive to pass along the savings. After all, stations pocket the difference. Eventually someone on the block drops prices, forcing others to drop prices too. But the reaction is nowhere near the immediate reaction to higher wholesale prices. I wrote about this for msnbc.com a few years ago. Here’s the link, though the story is a bit messy to read now.

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 What does all this have to do with employment? Just as stations raise prices faster than they lower them, corporations fire workers faster than they hire them.  During slash-and-burn times, companies throw workers overboard, leaving the remaining employees to pick up the slack.  Under fear of being part of the next layoff round, workers overperform. That’s why productivity rises during recessions, and during the Great Recesion, it skyrocketed

 

And now we come to today.  Things are better.  More people are paying their bills.  Companies are making solid profits again. Only this time, they are making more with less!  Frenetic workers are still behaving like it’s fall 2009, as if they are bailing water out of a sinking boat. Corporations are enjoying the newfangled productivity.

House ad 450wThat’ll work for a little while. But eventually, it won’t. As Henry Ford realized, workers who don’t have any money won’t buy things, and that’s bad for the economy. Very bad.

“The risk at this point is that the consumer is falling back into a pattern of mediocre spending growth,” said Stephen Stanley to Bloomberg about the consumer spending numbers. The chief economist at Pierpont Securities LLC in Stamford, Connecticut, Stanley correctly predicted the spending decline. He has also predicted a slowdown in economic growth; he lowered his second-quarter growth forecast to 3.3 percent from 3.5 percent. “You need to see more wage growth.”

Meanwhile, workers need to start exerting pressure from the bottom up.  It’s time to realize that you don’t have to be “just happy you have a job” any more. Time to shop around, flirt with other employers, ask for a raise, demand smartphone-free nights and weekends.  That’s partly why I wrote my Getting Unstuck book and email series.  I’d like to encourage people to demand more again, not just for yourself, but for the economy.

We need to see more wage growth.

Learn about Bob’s new book, or sign up for his 30-day Getting Unstuck challenge.

 

 

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About Bob Sullivan 1605 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.