How a Rebounding Economy Will Put More Pop in Your Paycheck
Business + Economy

How a Rebounding Economy Will Put More Pop in Your Paycheck


Yesterday’s GDP data made clear that the U.S. economy was in a winter lull over the first three months of the year, but today’s economic releases suggest that freeze has thawed some — and offer a few reasons for optimism over the rest of the year.

1. The job market is tight. New claims for unemployment benefits fell to 262,000 last week — the lowest level since April 2000. The four-week average of 284,000, which provides a better indicator of the trend in firings than one single data point, is still near a 15-year low. “April claims data continue to suggest that the slowing in payrolls in March was a temporary weather blip rather than a sign of slower labor demand growth,” UBS economists wrote Thursday.

Related: The Job Market May Be Tighter Than It Looks​

2. That tightness is leading to higher wages. The Bureau of Labor Statistics’ Employment Cost Index released Thursday shows clear signs of an uptick in compensation. Wages climbed by 0.7 percent in the first quarter, lifting the annual growth rate from 2.2 percent to 2.6 percent, the fastest rise since late 2008. Compensation in the private sector grew slightly faster, at a 2.8 percent annual rate — up from 1.7 percent a year ago.

“These growth rates are still quite modest by historical standards, but the upward trend is now very obvious,” Paul Ashworth of Capital Economics said in a note to clients.

That uptrend — seen mostly in high-skill sectors like information technology and professional services but also to some extent in low-wage sectors affected by state and local minimum wage hikes — is evidence that the tightening job market is finally driving businesses to offer higher pay. “Wage growth through much of the recovery from the Great Recession has been slow, as high unemployment has limited the bargaining position of employees. But as job growth has accelerated over the past year and the labor market has tightened, workers have gained more power relative to firms and compensation growth has picked up,” Stu Hoffman, chief economist at PNC Financial, said.

3. Higher wages should power stronger consumer spending. The March spending data out Thursday shows some signs that consumer spending is rebounding, too. Personal consumption expenditures rose a slightly less than expected 0.4 percent in March, according to the Bureau of Economic Analysis. The numbers reinforce the idea that winter weather kept some consumers from shopping while others were holding back to see if their savings from lower gas prices were just temporary.

Related: Can U.S. Consumers Bounce Back? 3 Numbers to Watch

“Consumer spending came back to life in March after a relatively weak February,” Chris Christopher, Jr. of IHS Global Insight wrote. “In February, spending was weak due to unseasonably colder winter weather, increasing gasoline prices, and high household utility bills. When March rolled around, many Americans headed to the mall, bought that new automobile, and had some extra money since their household utility bills were lower.”

On the downside, inflation-adjusted personal disposable income fell 0.2 percent in March, leading to a decline in the savings rate to 5.3 percent from 5.7 percent in February. Still, over the entire first quarter, real disposable personal income grew at an annual rate of 6.2 percent and Ashworth notes that the savings rate is still above the 4.5 percent range it was at in the fall. “Accordingly,” he says, “there is scope for consumption growth to accelerate even without strong income growth.”

Add in rising wages, and consumers should have more room to spend in the months ahead, adding to the likelihood that the stagnant first quarter of the year was more of a blip than a sign of another slowdown.

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