The U.S. economy is expected to expand at a disappointing pace in 2012, similar to the tepid 1.7 percent growth rate achieved in 2011, despite recent job gains, according to economists at HSBC, who said wages have failed to keep up.
Stagnant wage gains have been limiting the growth in household income, potentially posing significant challenges to the nascent economic recovery.
Consumers are still hurting from substantial losses in wealth -- primarily in real estate -- and this creates an incentive for households to save more and spend less, which could be a drag on the economy. Consumer spending accounts for more than 70 percent of the U.S. economic growth.
In 2011, the second full year of recovery from the 2008/2009 recession, consumer spending in real terms grew 1.6 percent, well below the long-term average of 3.2 percent.
After declining steadily for more than two decades, the personal savings rate changed course and shot higher -- from 2.4 percent in 2007 to an average of 5.3 percent between 2008 and 2010 -- the peak of the U.S. recession.
An unexpected surge in energy prices last year pushed savings rate lower as consumers were forced to cut back to buy fuel to get to work, school and run errands.
Over the first few months of 2012, the savings rate has fallen further, to 3.7 percent in February.
While economists don't expect the rise in crude oil prices this year will trip the economy back into a recession, it will still have some dampening effect on the growth of consumer spending.
We expect that, as the year goes on, consumers will try to rebuild savings by curtailing the growth in spending, Kevin Logan, chief U.S. economist at HSBC, said in a note to clients.
Lackluster Income Growth
Job gains accelerated in 2011 compared to 2010, but wage gains didn't. Average hourly earnings rose 2 percent in 2011, down from 2.4 percent in 2010.
In real terms, income per capita stagnated in 2011, increasing 0.7 percent despite a decent pickup in the growth of overall employment.
In the early 2012, the downtrend continued with the year-over-year gain in January and February averaging 1.5 percent.
Aside from the slowdown in wage gains, transfer payments from the government to the household sector also slowed down last year and are likely to drop again this year.
The high level of unemployment, combined with a record rise in the average duration of unemployment, led to unusually large increases in unemployment insurance benefits over the last three years.
This income transfer is falling and it will fall faster as the year goes on as more and more unemployed workers exhaust their insurance benefits, Logan said.
A decline in unemployment benefits is a normal phenomenon as a recovery gets underway and employment increases, Logan said.
But in this expansion, the average duration of unemployment has reached record levels and is still rising, he added, pointing out that at 40 weeks, the current average duration of unemployment has doubled the previous record of 20 weeks set in 1983.
As unemployed workers exhaust their unemployment benefits before finding new jobs, the growth in aggregate income is curtailed.
The squeeze on real income, or what's left after taking into consideration the effects of inflation on purchasing power, may well continue for much of 2012.
HSBC estimates the average increase in the consumer price index, a main gauge of inflation, will likely be about 2.3 percent in 2012. That's down from 3.1 percent in 2011, but still above the rate of increase in average wages.
Unless we see a quick turnaround in wage gains from the recent lackluster pace of 1.5 percent, real incomes are likely to erode further, Logan said.
With consumer spending growing at roughly the same rate as last year, an acceleration in GDP growth is unlikely.