Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.
Salary and benefit growth “has been going nowhere,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “One of the key reasons the recovery has stalled is that real incomes have fallen.”
While policy makers from Federal Reserve Chairman Ben S. Bernanke to President Barack Obama focus on cutting unemployment stuck near or above 9 percent since April 2009, the widespread stagnation in wages may offer a better explanation for the failure of economic growth to accelerate two years after the end of the recession. Workers’ ability to negotiate higher earnings won’t return until the job market strengthens, and flagging confidence has raised the risk that consumers may retrench.
Inflation-adjusted weekly earnings have fallen for six consecutive months, dropping 1.8 percent in August from a year earlier, a pace not seen since the 18-month economic slump ended in June 2009.
“Those who are employed are worried about their income and are seeing real purchasing power get squeezed, therefore they’re set to retrench a bit,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who has served on the Fed board’s forecasting team. “That’s the danger right now. It means the recovery remains very fragile.”
Companies including United Parcel Service Inc. (UPS) say they have flexibility to hold down employee earnings, given uncertain demand and an excess supply of labor. Retailers such as Kohl’s Corp. (KSS) report that elevated food and fuel prices have cut into paychecks, restraining shoppers.
“The biggest issue is that labor income is soft at a time when we’re getting no offset” from other sources, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Unlike in the early part of the recovery, stock-market losses are eroding wealth and home prices continue to decline, he said.