Victoria Stilwell| Bloomberg News
When it comes to U.S. economic growth, wages may never have been this important.
The link between earnings and consumer spending has been tighter in this expansion than in any other since records began in the 1960s, according to calculations by Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York.
Wages have become even more critical as households, still shaken after being caught with too much debt when the recession hit, remain unwilling or unable to tap home equity or let credit card balances balloon to buy that new television or dishwasher. By not overextending themselves again, Americans are only spending as much as their incomes will allow, meaning that 70 percent of the economy is riding on how fast pay rises.
“In an environment where credit is not being used in a material way, the fate of wages matters,” Porcelli said. “They’re doing all of the driving from a consumption perspective.”
The correlation between growth in wages and consumer spending adjusted for inflation stands at 0.93 since June 2009, when the recovery began, according to Porcelli. A reading of 1 means they move in the same direction all the time, zero means there is little relationship and minus 1 means they continually diverge.