MNI ANALYSIS: US Retail Lagging As Real Earnings Slow

Repeats Story Initially Transmitted at 17:20 GMT Mar 23/13:20 EST Mar 23

By Sara Haire and Holly Stokes

     WASHINGTON (MNI) - Despite a 17-year historic low unemployment rate and

average hourly earnings on the rise, retail sales have surprised with three

months of weakness - which lends itself to speculation on where consumers are

spending their money. 

     Average hourly earnings, AHE, have been rising for four months in a row,

and disposable income has been up every month since July, with January posting a

0.9% month/month surge. While increased earnings have traditionally meant

stronger retail spending, this trend has halted in recent months. Retail sales

have fallen by 0.1% in each of the last three months, even as disposable income

and AHE continued to increase. 

     February's overall sales decline and weak ex-auto sales came as an even

greater surprise, as many analysts had assumed that tax cuts would allow for a

rebound in retail sales. However, any increase in earnings did not flow through

to February's sales data.

--PCE SHOWS CONTINUED SPENDING

     While retail sales are an important indicator of overall consumption, they

do not account for all spending. Personal consumption expenditures measures how

much people are spending on all goods and services. When looking at the chained

PCE index, there have been continued gains since June. Though people are not

spending as much on retail sales in recent months, the trend of expenditures

increasing shows that earnings are still being put to use, but for other

purposes. 

     Inflation has been rising steadily since the recession, but if you break

the PCE price index down between goods and services, inflation for goods has

remained relatively low, averaging 0.3% while services has increased 2.2% on an

annual basis. While one might expect that consumers would be encouraged to buy

more goods as prices remain low, this is not necessarily the case as more income

is being directed towards necessary services, including housing and utility

expenditures.  

--COST OF LIVING ON THE RISE

     The year/year change in rent has been on an upswing since 2011. While the

change has seemed somewhat gradual month/month, the year/year percent increases

in rent of primary residences has been consistently closing in on 4% growth

since June 2015. As rental pressures continue to approach pre-housing bubble

levels,  AHE year/year have been struggling to keep up.

     Whether one rents or owns a home, utilities are an essential expenditure

for consumers. In an effort to slightly account for the monthly volatility in

energy prices, a look at the year-over-year change for CPI's energy services

price index shows a definitive rise (with the exception of a year and a half in

2015 to 2016). Since prices for utilities are rising, more people are forced to

spend the slight gain in their earnings on necessities and not as much on goods

captured in retail sales data. 

     According to an MNI analysis on wages published March 12, supervisory wages

have been boosting average hourly earnings in eight of the last 12 months,

clouding the fact that 80% of the US workforce have been experiencing more

modest wage gains. As lower income housing is typically less energy efficient,

it is the population of lower wage earners that are experiencing a greater

impact of rising energy costs, curbing their other spending. Compounding the

pressures of energy prices, extreme weather in recent years has increased

overall utility usage with no signs of slowing down.

--REAL EARNINGS STRUGGLING

     Given that the rise in the cost of living appears to be outpacing the

increases in average hourly earnings, it is important to consider what real

wages are doing and if wage inflation is able to keep up with the overall

economy.

     While average hourly earnings have been on a general upward climb, the path

for real average hourly earnings has been less steady. In particular, real

average hourly earnings have been on a downward trend since September 2017, but

are still strong compared to recent years. 

     Interestingly, this fall in real average hourly earnings coincides with the

unemployment rate slipping to its low 4.1% - leaving the question of just how

tight the labor market will need to get for wage inflation to match the overall

pace of the economy. The FOMC's median projection of a 3.6% unemployment rate by

2019 is perhaps a nod to the need for an even tighter labor market to keep up

with the economy and boost real wages. 

     As the unemployment rate continues to sit at historically low levels,

prices have begun to rise and should continue their upward trend in response.

Without an upward movement in wages in return, it opens the door for overall

consumption to decline in the near term as people's purchasing power declines

and they can only spend on the necessities. Despite the FOMC projections

revealing an upward revised forecast for GDP in 2018 to 2.7%, if the labor

market remains tight but real wages do not rise, this could be later revised in

future projections. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com